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MARCH 11, 2007
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The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
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Business Today,  February 25, 2007

The Great Indian Divide
Growth must be more inclusive; the alternative is social unrest.
Bandhs, agitations: Is globalisation to blame?
Karnataka grinds to a halt over the Cauvery dispute. The Nandigram issue paralyses West Bengal. Life comes to a halt in Assam following the gunning down of migrant labourers from Bihar. Agitating farmers shut down a national highway in Maharashtra. Normal life disturbed as traders in Delhi down shutters.

Pick up any newspaper and you will come across one or more such reports. Each of these issues has its own unique trigger but there is also a common thread running through them. At their root lies real or perceived threats to the livelihood of the agitators. As the economic, social and cultural forces unleashed by economic reforms and globalisation play themselves out, they turn existing equations upside down and create new sets of haves and have-nots (actually, they are creating more of the latter). And most of these agitations and violent protests are seen as the backlash from those sections that are feeling left out of the process of wealth creation that is happening across the country.

"India has Achaic Labour Laws
Why the Inflation Rate is Rising
If you Can't Fight Them, Join Them
MF Segment: More Retail Investors

M.V. Rajeev Gowda, Associate Professor of Economics and Social Sciences at IIM Bangalore, says that this is the price democratic societies have to pay during a transition phase. "Over the last 15 years, we have moved from being a fairly closed society to one that is integrating fast with the rest of the world. This process has created a churn-and we are increasingly becoming a winner-takes-it-all kind of society. The losers, naturally, are feeling alienated. Growth is important, but it has to be seen to be equitable for it to be acceptable to everyone."

T.S.R. Krishnamurthy, former Chief Election Commissioner, points out that the benefits of economic development have been lopsided. "It has brought a windfall for some and hopelessness for others," he says. Arvind Kejriwal, founder of Parivartan, which describes itself as a "citizen's movement," adds that the social unrest is the result of an absence of any meaningful participatory democracy and governance. "Who consulted poor farmers before their lands were notified for SEZs? Is it, then, any surprise that they resort to violence to retain their only source of livelihood?"

A look at some of the issues that are sparking social unrest.
» Globalisation is leading to stark differences between winners and losers
» Many people are unable to cope with the pace of change
» Awareness and aspiration levels have increased » Urbanisation is leading to greater stress
» Old social support networks are collapsing; new ones haven't yet come up
» Rapid changes are seen as threats to cultural identities

Globalisation has greatly benefitted knowledge workers and a large section of the white-collar workforce in the manufacturing and top-end services sectors, who comprise barely 25-30 per cent of the country's population, and increased disparities between this class and the rest of the country.

If one looks at history, it will be evident that this is not a uniquely Indian phenomenon. Post-industrial revolution, England faced a similar situation two centuries ago and successfully addressed it. The Luddite Movement of the early 1800s, during which workers, led by Ned Ludd, destroyed textile machinery in Nottinghamshire, Yorkshire and Lancashire, which they felt were throwing workers out of jobs, is a classic example of how rapid industrialisation can disrupt a society in transition. At one point, British troops fighting workers opposed to the Industrial Revolution outnumbered those battling Napolean Bonaparte in the Iberian Peninsula. More recently, countries such as Venezuela, Brazil and even China have witnessed violent agitations over this issue.

N.R. Narayana Murthy, Chief Mentor and Chairman of Infosys, says that while the progress made by the economy and business over the last 10 years is outstanding, "we have taken our eyes off the critical farm sector, which is the only source of income for 65 per cent of Indians. We have to embrace compassionate capitalism not only for inclusive growth but also to tackle the socio-economic ills plaguing our society." More than half of India's population is under the age of 25. Unless we evolve steps to deliver them an equitable portion of the pie, the much hyped demographic dividend could well turn into a demographic disaster.

The fortnight's burning question.


No. Kunal Banerji, Vice President (Marketing), Ansal API

The general demand for real estate continues to be healthy. There may, however, be pockets in which a correction takes place. This is particularly likely in markets that have overheated due to investors' expectations of quick returns.

Maybe. Anshuman Magazine, MD, CB Richard Ellis, South Asia

It is difficult to predict real estate prices in an immature, albeit rapidly growing market such as India. Due to increased supplies, prices will come under pressure in certain markets. However, prices will continue to rise in other pockets, though at a lower rate than has been the case over the last two years.

No. Kunal Kakad, National Director, Colliers International India

The demand-supply mismatch in the Indian real estate sector will start stabilising in the next six-to-eight months, but we don't foresee any significant correction in prices during this period. However, prices will fall in some micro-markets where they have been driven up by speculative activity.

"India has Archaic Labour Laws"

Caralee McLeish Sabine Hertveldt
Sabine Hertveldt and Caralee McLeish of the World Bank have recently come out with a report on "Doing Business in South Asia". Hertveldt discussed the report with BT's over phone from Washington D.C. Excerpts:

Despite being one of the fastest growing large economies, India ranks quite low on your list. Why is it so tough to do business in India?

It could be because we did not factor in most macro-economic indicators. South Asia scores well only on two out of 10 indicators.

What are the specific reforms that South Asia must adopt so as to make it significantly easier for people to do business?

South Asian countries have archaic labour laws. It is very difficult to lay people off. Also, the legal process in India takes much longer than in most other regions of the world. It must, however, be said that individual Indian cities do follow best practices in specific areas. If the country as a whole were to follow these, its ranking would go up to #79 from #134 at present.

Your report concludes that it is easier to do business in smaller cities than, say, in Mumbai or Kolkata. What explains this?

In cities like Mumbai, it takes very long to resolve business disputes. In smaller cities, disputes are more easily resolved primarily because the volumes are much smaller.

Why The Inflation Rate Is Rising

Unlike in the past, when global crude oil prices were the main culprit, this time around the run-up in inflation is due to food articles
Call it end-of-the-year blues. At the fag end of what has been a rollicking year by all measures, inflation has reared its ugly head, scraping close to 7 per cent, well above the RBI's and the government's tolerance range of 5-5.5 per cent. Unlike in the past, when global crude oil prices were the main culprit, this time around the run-up in inflation is due to food articles. Prices of wheat, pulses, milk, fruits and vegetables have all risen sharply over the past few months.

Why? There is no single reason. Localised crop failures have led to blips in prices of some commodities. Others have been pushed up by more serious issues such as insufficient production to match rising consumption, poor productivity and insufficient procurement by government agencies. All these are conspiring to push up prices.

"The inflationary pressures (on food articles) have been particularly acute this time due to supply side constraints which are a combination of temporary and structural factors," says Subir Gokarn, Executive Director and Chief Economist, CRISIL. Is an inflation rate in the region of 7 per cent exceptionally worrisome? Maybe not, if you look at the average decadal growth in inflation over the past two decades, but it is a fact that in recent times, India has got used to more benign inflation rates.

Galloping prices make bad political news, especially ahead of elections in crucial states (read: Punjab and Uttar Pradesh). The price to be paid is often heavy. The BJP was routed in Delhi in the wake of the onion price rise in 1998. Ominously enough, onion prices have more than doubled over the past month to over Rs 20 per kg.

No wonder then, no efforts are being spared to douse the inflationary fire. The government has cut fuel prices for the second time in the last three months. Though not directly responsible for price rise this time, the cut is expected to partially offset the rise in prices of food articles. However, the ripple-effect will take some time to make a tangible impact.

To cool agri-commodities, the government response has ranged from curbing exports (at different times, it has clamped down on exports of wheat, sugar and milk powder) to easing import duties to even banning futures trading in select commodities.

Mostly fire-fighting measures, these efforts, too, are not likely to have an immediate impact. Former Finance Minister Yashwant Sinha points out that the supply side cannot be managed on a 15-day notice or even on a month's notice. "We know from the experience of onion and pulses in 1998 that there are no readily available, exportable surpluses anywhere in the world that can be accessed at such short notice," says Sinha. This is especially so in case of crops such as pulses which are unique to India.

So, maybe, it is time to learn to live with higher inflation, at least for the next few months. A better option would be to use the trigger provided by higher inflation to fix some of the systemic and structural issues related to Indian agriculture. Maybe it is time to wipe the dust off the numerous reports on agriculture and see what needs to be done there.

If you Can't Fight Them, Join Them

Us calling: And India's responding
A few years ago, when us companies were moving jobs to India (and slashing them at home), the phrase "Getting Bangalored" became a pejorative term for losing one's job to a cheaper (and often higher quality) engineer in India's Silicon Valley. However, as Indian companies begin to expand their global footprint and scale up their presence in the US, they are now creating new jobs in that country. According to a ficci-Ernst & Young study, the us attracted the highest share of Indian direct investment ($2.15 billion or Rs 9,460 crore) between 1995 and 2005, with the much-maligned it industry leading investments into the country. While India initially attracted foreign investment in its technology and outsourcing sectors, global expansion plans by it firms such as Infosys, TCS and Wipro, among others, are now beginning to generate jobs in the US.

Overall, data from IBM-Plant Location International (PLI) indicates that India has jumped three places from #10 to #7 in the list of FDI-origin countries. "Investors come to the us for access to the world's largest and most sophisticated consumer and business markets, as well as for top-notch talent in areas like biotech. This explains why the services, consumer goods, and pharmaceuticals sectors, which are the heaviest users of it, are relatively more successful than other us industries at attracting new investments," notes Navi Radjou, an analyst with Forrester Research, a Cambridge, Massachusetts-based technology research agency. "These FDI flows give an early indication of the specialised and synergistic roles that India, China and the us will play in future," he adds.

Despite this apparent cooperation, points of friction remain. IBM Plan Location International Co-leader Roel Spree argues that "global competition for new jobs and capital investment is increasing and developed and developing regions must continually define and implement new strategies to attract investment".

Perhaps as a result of the changing dynamics of offshoring, the clamour against it, which had reached a crescendo prior to the last us presidential elections, is slowly petering out. There is growing realisation that even as some us jobs are becoming redundant, others are being created-some of them by the very Indian companies that are accused of taking them away.

"The US' long-term prosperity lies in specialising in skills that complement, not duplicate, Chindian talent," observes Radjou. "We believe that the skills available in the us, India and China are complimentary to each other and it's in India's best interest to focus on its strengths of abundant, high-quality and low-cost talent," adds T.V. Mohandas Pai, Director (HR), Infosys.

MF Segment: More Retail Investors

Retail investors are joining the party on the bourses in droves. Says Sameer Kamdar, National Head (MF), Mata Securities: "From a high of 80-85 per cent, the institutional share in the mf industry has come down to 55-60 per cent." In some segments, retail investors have even ousted institutional ones from their dominant positions. The equity segment now accounts for 35-40 per cent of total assets under management compared to 16 per cent three years ago. And retail investors account for 90 per cent of this segment. Says a senior mf industry executive: "Liquid funds and fixed maturity plans (which make up 45-50 per cent of the mf industry's total corpus) are still dominated by corporates. Secondly, most retail players are not mature investors. Till they become more financially literate, I don't see them dominating the market."