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Annus Mirabilis/Annus
Horribilis Well, 2004 was in a way a year of contrasts for the Indian economy. It was a literal roller-coaster ride almost everywhere. From a benign under five per cent earlier in the year, inflation breached a five-year high of eight per cent mark in September. From the euphoric 'India Shining' feeling pre-elections to the all-round dejection with Left-supported United Progressive Alliance (UPA) government coming to power and with it a never-before seen blood-bath at the stock-markets. Oil prices jumped from a $ 35 per barrel to a high $ 55 per barrel, before settling at near $ 40. To top it all we came very near to a drought in 2004, even while our foreign exchange reserves touched and then crossed the $ 100-billion mark for the first time ever. Yet the year closed with the bellwether Bombay Stock Exchange's Sensex touching an all time high, with Foreign Institutional Investors (FII) pumping money into India as if there is no tomorrow. If anything, 2005 will not be like 2004. On the brighter side, oil prices can only head south from its highs of 2004, what with the uncertainty of the US elections and Iraq behind us, and this will help ease pressure on prices all across the economy. A weak dollar, getting still weaker will bring down the oil import bill and this will mean better state of government finances. And even though the Left will continue to bark at any efforts at liberalisation or privatisation, political exigencies will force it not to bite, opening mega sectors like airports, insurance and retail to private and foreign players. A resurgent stock-market, though coming down from its highs of 6400 plus, will usher a boom for businesses wanting cheap capital, and the money thus raised will fan the much-needed capacity addition or improve competitiveness of Indian businesses by triggering a merger & acquisition wave. And yet there is much that can go terribly go wrong and spoil a perfectly laid out party. Rising interest rates for instance can slow down credit offtake, both for capital and consumer goods, and this will impact not just banks but the broader consumer good economy. Even a soft-landing, of the still growing at 9 per cent plus Chinese economy seems very likely what with huge political and economic pressures on Beijing to slow down. And this will have a disastrous trickle down effect on all Asian countries including India. Coupled with a scenario of ever-eroding dollar, pressure will mount on commodity exports and the Information Technology and the Business Process Outsourcing (BPO) sectors, with severe dent on profitability, and its ability to generate more jobs. With Left still smarting from its ignomious retreat on airport & airline privatisation and oil price hike, they may go ahead full-steam on job reservation in the private sector and may clash with the UPA government, a scenario that will create political stalemate ending in yet-another general elections, that nobody, well not even the opposition-in-disarray, wants. Did we say 2004 was a roller-coaster? -Shailesh Dobhal Budget 2005 On December 13, 2004, Finance Minister P. Chidambaram had every reason to be happy. He had just tabled a 55-page "Mid-Year Review'--a glowing picture of the Indian economy in the first six months of this fiscal--in both Houses of Parliament without so much as a murmur of protest from the opposition benches. No wonder then, the Finance Minister was at his effusive best outside Parliament: Enthused by the strong fundamentals in the first six months of the economy and even brighter prospects in November and December, Chidambaram exulted: "I think if all the players play their part, the year will end on a very substantial and positive note.'' More interestingly, he also set the tone for Budget 2005-06 by stating that the core areas of future tax reforms included removal of discretionary exemptions as suggested by the Kelkar Committee Report on direct and indirect taxes to raise the tax GDP ratio to 10 per cent and maintaining it there for a few years, moving to ASEAN (Association of South East Asian Nations) levels as far as custom duty is concerned. Introducing the value-added tax from April 1, expansion of list of services of taxation and widening of the tax base. A careful reading of the Mid-Year Review also reveals the crucial issues that the Finance Minister might address in the forthcoming Budget like a reduction of the burgeoning food subsidy--Rs 25,000 crore in 2004-05 by possibly incorporating the suggestions of National Institute of Public Finance and Policy-set up for this very purpose last year--shore up investments in infrastructure by announcing far reaching measures to spur investments in roads, airports, ports, power and railways, and reducing the country's vulnerability to crude prices. "As far as tax reforms are concerned, they are likely to be in line with Vijay Kelkar's panel recommendations although there will be some modifications and fine tuning,'' contends Ajit Ranade, chief economist at Aditya Birla Group. The panel headed by Vijay Kelkar had laid down the ways of implementing Fiscal Responsibility and Budget Management Act--which envisages reducing revenue deficit by at least 0.5 per cent of GDP and cutting fiscal deficit by 0.3 per cent annually--that included far reaching tax reforms including reduction in corporate tax rate, hiking the income tax exemption limit and phase-out of exemptions. "It could also mean a comprehensive review of laws and procedures underpinning the tax policy and administration,'' adds the mid-term review. So what could we expect from Chidambaram's new team of Parthasarathy Shome (economic advisor), K.M. Chamdrashekar (revenue secretary) and Rakesh Mohan (secretary, Economic Affairs)? "A 5 per cent cut in peak customs duty could well be on the cards bringing it down from 20 per cent to 15 per cent in line with the country's avowed aim of reaching ASEAN levels,'' contends Abheek Barua, chief economist at ABN AMRO Bank, India. Others maintain that reducing corporate tax rate to by 5 per cent to bring it down to 30 from 35 per cent too could be on the cards to align with peak income-tax level. Chidambaram will also seriously consider whether the customs duty on crude oil should be cut to 5 per cent from 10 per cent at the present. A final decision will, however, hinge on the recommendations of the Ashok Lahiri Committee on rationalisation oil duties. As for the others we will have to wait for the morning of February 28, 2005. -Ashish Gupta Cities It was a hoary cliché to say that India lives in its villages. No longer true. While at the time of independence only around 14 per cent lived in cities, today nearly a third of India's growing population lives in cities. From around 52 million at the time of India's independence, to around 305 million people today, Indian cities have been well, exploding. To get a sense of perspective, the amount of people living in India's cities is more than the entire population of United States of America. India has 35 cities which have more than a million people. These one third urban population of India contributes nearly 60 per cent to the national income. So what happens to these cities is very crucial. All the major cities of India like Mumbai, Kolkata, Delhi, Chennai, Bangalore, Hyderabad, Ahmedabad, Pune are facing similar problems. A marked detoriration in the physical environment and quality of life. An ever widening gap between demand and supply of essential services and infrastructure, as well as distortions in land and housing markets have only excaberated the problem. The Ministry of Urban development and poverty alleviation estimates that about one third of the urban dwellers live below poverty line. About 15 percent of the urbanites do not have access to safe drinking water and about 50 percent are not covered by sanitary facilities. Traffic congestion has assumed critical dimensions in many metropolitan cities due to massive increase in the number of personalised vehicles, inadequate road space and lack of public transportation. The problem has been accentuated by the Infotech led job boom in cities like Bangalore, Chennai, Hyderabad and Pune. (See Cities on the Edge, Business Today, December 5, 2004) The Ninth Plan Working Group on Housing has estimated the investment requirement for housing in urban areas at Rs.526,00 crores. The India Infrastructure Report, 1996 estimates the annual investment need for urban water supply, sanitation and roads at about 28,035 crores for the next ten years. The question is where all this money and investment would come from? Swati Ramanathan an urban planner points out that with 600 million Indian expected to live in cities by 2030, unless they get their act together, they would face dire consequences. The cities have been experimenting with various modes of private-public-partnership (PPP). To increase the financial health of the local bodies a number of instruments like municipal bonds, tradable dvelopment rights, urban shelter and infrastructure funds are being created. Bangalore had been first off the block in creating a unique PPP and Mumbai tried its own version through Mumbai First. After a change in government in Karnataka the Bangalore experiment also seems to have been abandoned. The challenge would be to instutationalise a mechanism which would involve involving everybody in renewing our cities. However , there seems to be little room for optimism if the experience of the past is any guide to the future. While there is growing urbanisation leading to cities exploding at the seams, policy makers and city fathers seem to be still struck in time wrap. This only means that whichever city you are living in India, expect your quality of life to detorirate further. That means in Chennai, the water shortages will get worser, in Bangalore power outages will be more frequent, in Delhi the level of pollution to go up, in Mumbai you will find one more slum coming up and in Pune that the traffic jams gets even harder to negotiate. -Venkatesha Babu Disinvestments Well begun but not even half done. After the promising start of 2004 when as many as eight promising companies such as IPCL, CMC, IBP, Dredging Corporation of India, Oil and Natural Gas Corporation etc. went under the hammer between January and March, it was back to the old days. The newly elected UPA government not only put an end to any talk of strategic sales of public sector units but also managed only one initial public offering --National Thermal Power Corporation-- in the six months that it has been in power. And it is unlikely that the government will garner any more revenue from the disinvestments receipts than the already collected Rs 3034.68 crore -a record of sorts. However, if the government can get its act together, it can raise similar amounts next year too, feels Prithvi Haldea, Managing Director, Praxis Consulting & Information Services. His logic: Not only is there a bull run in the secondary market today, but even the retail investors are hungry for good but under priced stocks as was seen in the case of NTPC, ONGC and other shares. Secondly, there is a host of mega issues in the pipeline, which includes public sector heavyweights from Bharat Heavy Electricals Limited, Bharat Sanchar Nigam Limited, Shipping Corporation of India Limited, to banks such as Allahabad, Andhra and Punjab National Bank to the private biggies like Reliance Infocomm, Tata Teleservices, HDFC Bank, and Cadilla Pharmaceuticals that can only fuel the investors appetite. A heady mix that could put a smile on the government's face. -Ashish Gupta Economy "India's growth story is intact. And it can only get better with time.'' This is one clear message emanating not only from homegrown economists and heads of financial institutions but also from global CEOs. Take a look at the various projections and the statement becomes clear. The International Monetary Fund, for instance, has projected a 7.2 per cent GDP growth for 2005-06, nearly a 1.6 per cent jump over its 2004-05 projection estimate. Or for that matter Credit rating agency, ICRA. It is predicting a 6.8 per cent GDP growth for 2005-06 compared to the 6.3 per cent growth in 2004-05, of course with a few caveats. It assumes that there will be a normal monsoon and hence a small increase in farm output--slightly less than 2 per cent--an industrial growth of 7.2 per cent and the expansion of services sector by 8.5 per cent. Even investment firm DSP Merrill Lynch is projecting a rather rosy outlook for India for the next financial year--a 7.3 per cent GDP growth. And that feel-good factor seems to be rubbing off on the foreign financial institutions. After the free fall of May 17, 2004, when the stock market crashed like never before, it has become the darling of the FIIs. It has invested nearly $8 billion till December 15, 2004 and its thirst still continues. So why is everybody so gung ho about 2005-06? For analysts like Surjit Bhalla, MD, Oxus Research and Investments, there are a host of factors to explain the sudden interest. Firstly, there is a strong belief among the market players that the industrial recovery is likely to be sustained for sometime with a moderate rise in pricing power, which is likely to translate into robust earnings. Secondly, there seems to be a growing confidence in the Congress-led United Progressive Alliance and its commitment to reforms. Then, there is the growing apprehension about a slowdown in China and US in 2005 and the need to find a "safe haven'' market that is relatively insensitive to global demand fluctuations. Then there are other reasons for such optimism. The growing monster of inflation, a direct fall-out of the spike in oil prices, too seems to has been temporarily subdued--from 4.6 in March to 8.3 per cent in August end to 7.02 per cent on December 17--and prices of industrial commodities, another important contributor to the inflation story, too is likely to be tamed, because of the expected slowdown in the Chinese economy. Again the fact that investments in project spending has gone up dramatically in 2004-05 as compared to 2003-04--by as much as 515 per cent according to RBI statistics--with the bulk of the investments going to power and the telecom sector means better infrastructure in the coming years. Metal manufacturers are also on an expansion spree as are textile producers who are gearing up for the post-Multi Fiber Agreement phase beginning from January 1, 2005, which should mean more jobs. Exports too have been zooming despite an appreciating rupee. The first six months of this year saw exports surge by 24.4 per cent in dollar terms as compared to a modest rise of 8.8 per in the corresponding period last year. Similarly imports too have grown by 34.3 per cent in the first six months this year compared to 21.3 per cent last year. Moreover, the rising share of " newer'' category of exports like pharmaceuticals, transport equipment that are associated with higher value addition and less exchange rate fluctuations are also good news for the economy in 2005, even if there is a slight slowdown in exports because of the global situation. Similarly, the Centre appears to have restored some semblance of order in its finances, therefore mitigating against the risk of a fiscal mess. Fiscal deficit at Rs 53,235 crore for April to September this year was 38.7 per cent of the Budget estimate, compared to the Rs 81,014 crore or 52.7 per cent of the Budget estimates of last year. All pointers to a good 2005. But there are still a host of factors that can play spoilsport. Interest rate hike can pull down private sector investments, and the government's fiscal deficit can go haywire if most of the new poverty alleviation programmes are put in place without corresponding increase in tax collection. "Last but not the least, another major spike in oil prices could bring down the growth rate to 6 per cent in 2005,'' contends the Asian Development Bank in its outlook for the Indian economy in 2005. -Ashish Gupta Family Business If a family business scion has a passion for golf (and not business), gift him a golf club and a smart caddie. Just keep him away from the boardroom Unsurprisingly these days--when the odds on any random Indian business family announcing a division of assets (or, worse, being rumoured to be working on a split) are not too dissimilar to the odds on a domestic company raising money overseas or making a cross-border acquisition--it's become fashionable to talk about the growing divorce between ownership and management. Such a demarcation between those who inherit and those who run the business will doubtless go a long way in protecting the interests of shareholders and succeed in eliminating any potential distractions in the quest for growth. But how successful really is the Indian business family in its avowed intention of staying a safe distance away from the day-to-day running of its operations? A few like the Ambanis and the Piramals have recently (for obvious reasons) stressed on the strong management teams that run each of their respective businesses, but a cursory glance through family-run Indian companies--they make up close to two thirds of the BT 500's Top 50--would reveal that the Chairman (the owner) is more often than not a synonym for the CEO (the manager). What a divorce from ownership and management essentially means is that if the son of a business family member wants to pursue his passion and apparent aptitude for, say, the 50-km walk, he should go ahead and do so, assured that the business (and the shareholding) passed down to him is safe--in the hands of a professional CEO. As Pallavi Jha, Chairman & Managing Director, Walchand Capital, points out: "If a family member is less equipped to run a business, he should have the courage to stay away." The lesson for the Indian business family from the recent messy conflicts for assets and power--which overnight cause irreparable damage to relationships nurtured over decades--is clear: Build an institution that doesn't need your surname to grow. Do that and your shareholders (including your sons and daughters) won't forget you in a hurry. -Brian Carvalho Government
Spending If there is one thing that can play spoilsport in the overall rosy picture of the Indian economy in 2005, it could well be the government's inability to meet the targets of the Fiscal Responsibility and Budget Management Act of 2003, which makes it mandatory on that the government to reduce its fiscal by 0.3 per cent and revenue deficit by 0.5 per cent every year. In fact, the "Mid-Year Review'' published by the Finance Ministry in December to outline its half-yearly achievement, is also quite categorical about its position. "While the fiscal deficit--the gap between total expenditure and receipts from revenue as well as non-debt capital resources--at 38.7 per cent of the budget estimate (Rs 53,235 crore) is much better than the FRBM target of 45 per cent, the revenue deficit--the difference between revenue expenditure and revenue receipts from tax and non-tax current receipts--at 78.7 per cent is considerably in excess of the FRBM target of 45 per cent,'' says the report. In other words, while the fiscal deficit target is well on course, the revenue target may turn out to be unattainable. Thus, while the revenue deficit should have been less than Rs 35,000 crore in the first six months of this fiscal, it has already touched Rs 59,591 crore, nearly 79 per cent of the budget estimate of Rs 76,171 crore. The reason for the slippage is the disappointing growth in the three major sources of government revenue--excise, customs and corporate income taxes. Revenues from excise and customs grew by 9 per cent only while corporate taxes have grown by 7 per cent. This performance seems to be at odds with the broader macro-economic indicators of the country. For instance, if imports grew by 34 per cent during April-September 2004, then there is simply no reason for customs duty to grow by only around 9 per cent, even if one gives due consideration to the various revisions that were made on duties on steel, crude and other commodities. And corporate profitability has certainly grown more than would be suggested by a 7 per cent growth in taxes paid. So it could well mean the government's inability to collect taxes. Again, the fact that the fiscal deficit is well under control has much to do with the accounting benefits that have come to the Central Government finances (Rs 29,341 crore) by way of the states swapping their high cost debts under the debt swap scheme. However, the good news is that in both in the personal income and service tax front, collection has jumped by 73 per cent (Rs 50,929 crore) and 69 per cent (Rs 14,150 crore) respectively. But there is a real danger of the fiscal mess getting worse in the coming months. The reason: The United Progressive Alliance government has lined up a host of employment and poverty alleviation programmes for the poor this year, without making adequate provisioning in Budget 2004-05. The new and revamped programmes under the National Common Minimum Programme (NCMP) include mid-day meal schemes, employment guarantee programme, backward states grant fund, rural health programme and irrigation-related schemes. The extent of the investments is clear from the fact that implementing the Employment Guarantee Scheme--guaranteed 100 days of work to one member of a BPL (below poverty line) family--alone will mean government additional spending of anywhere between Rs 10,000 crore to Rs 40,000 crore depending on the number of families asking for work. No wonder then that ministries are asking for Rs 52,000 crore for the next fiscal to implement these programmes, and the Panning Commission, which allocates plan funds to the states and central ministries, has demanded the use of a part of the huge foreign exchange reserve for plan spending in the next fiscal. -Ashish Gupta Healthcare According to Shivender M. Singh Joint MD, Fortis Healthcare Ltd, a Ranbaxy promoter Group Company, 2005 will be "an action packed year" for the $17 billion Indian healthcare industry poised to grow at 13 per cent annually for the next five years. He believes, "This sunrise sector may see new ventures and people in the coming year". Analjit Singh, Chairman Max India Ltd., echoes the sentiment, "2005 will flag the real entry and advent of competition in healthcare provider space." Rightly so, to claim a substantial pie of the $2.8 trillion global healthcare industry, India will have to tap more than just the 10 per cent domestic market potential it does currently. Healthcare a mammoth sector, which has for long attracted the attention of Corporate India, could well see the entry of some more new players. The rise in the middle-income group especially of institutional customers with larger pooled in resources and better paying capacity has been responsible for a sea change in attitude of healthcare providers, who need to meet the demands of quality conscious people. "The rising trend towards a more professional approach in healthcare is expected to get robust next year," says Shyama Nagarajan, Research Analyst, ICRA. The industry according to healthcare providers and analysts may also see amalgamation which is more organised and focused rather than sporadic and opportunity based. Nagarajan supposes similar consolidation within the industry, "smaller players may be acquired to operate on the franchise model," she says. Besides a churn in ownership industry insiders also expect shift of key healthcare managers and doctors across institutions. Quality infrastructure and processes that segregate administrative work from pure medicine make movement easy and is also conducive for professionals to leverage themselves better. While at quality, accreditation and standardization are the new buzzwords for healthcare sector in India. Providers like Singh of Max believe that year 2005 will see regulatory framework unheard of before, making healthcare a more serious business. Already a task force has been formed by the Confederation of Indian Industry's (CII) Indian Healthcare Federation (IHCF) to establish uniformity and minimum optimum standards for Indian institutions on accreditation for domestic purposes. Rating agencies like ICRA and CRISIL are being approached by hospitals across India for evaluation. ICRA for one has already evaluated close to 12 hospitals (including CMC, Vellore and Mohan Eye Institute, Delhi) and more hospitals are expected to catch up with this rising trend. To attract overseas patients, Indian hospitals are increasingly opting for the Joint Commission International (JCI) accreditation, an arm of the US-based Joint Commission on Accreditation of Healthcare Organisation (JCAHO). In fact, the Delhi facility of Apollo Hospitals expects to get its JCI accreditation in 2005, a first for any Indian hospital. Standardization is expected to not only bring about parity but also trigger help the cause of insurance. At present less than one per cent of the Indian populace (largely restricted to the metros) is covered by health insurance. Also recruitment firms are pinning their hopes on entry of corporate hospitals in the tier II towns of India. "A huge demand for better healthcare services coupled with high purchasing power, make the tier II towns an attractive option for large healthcare providers," says Tarun Bali, CEO, ABC Consultants. Pratap C Reddy, Chairman, Apollo Hospitals for one believes that holistic solutions through alternate medicine will make a significant impact in times to come. "We have the best of the East and West to give the patients, more institutions will begin to invest in alternate medicine and complimentary therapy." At Apollo, an entire floor is dedicated to complimentary therapy, which includes music, aroma, yoga, and pranic healing. Unlike Reddy, Shivender Singh is not so optimistic about alternate medicine, he however does see the pie getting bigger for preventive medicine and early diagnosis. "People are more conscious of lifestyle diseases and corporates getting involved with the health of employees will mean more business for the industry," says Singh. Medical tourism for one is expected to grow at more than the 20 per cent it did in 2004. For Reddy the tourism initiatives and open sky policy are as crucial as the healthcare providers to attract foreign patients. And whether the patent regime in pharma will have an impact on this mammoth sector of Indian economy. "The answer is clearly yes, but not immediate," quips Singh of Fortis. Some fear that it may hit prices adversely while others expect entry of more exclusive drugs under patent protection. Advantage patient? Remains to be seen. -Supriya Shrinate Infrastructure Its' hard to argue with the buoyant infrastructure growth figures put out by the government in its mid-year review of the economy, April to September 2004. Fifty six per cent of the total 5,846 Kilometer of the Golden Quadrilateral (GQ) has been completed. Goods carried by railways and at major ports were up 6.9 per cent and 9.8 per cent respectively. Domestic passenger air travel grew by leaps and bounds, at 25.4 per cent, and even international passenger traffic was up 16.4 per cent in April-September 2004 compared to 2003. Electricity generation grew by 7.8 per cent, and even the shortage came down from 6.9 per cent in 2003 to 6 per cent in 2004. And the best news was perhaps in telephony, with a total of 88.4-million connections (fixed plus mobile) till October 2004, up 27 per cent in October 2003. Looking ahead, the government has not just planned investment worth over Rs 2,000,000-crore in the infrastructure sector like roads, ports, irrigation, energy, telecom el for the next 10 years, but even seen to be seriously addressing the enabling regulatory environment. "I think across infrastructure, we will witness predictability and certainty in policy, and that's what investors love," says Jayesh Desai, Director, Transaction Advisory Services, Ernst & Young India. Well, he may have hit the nail on the head. In the power sector, the much needed Power Appellate Tribunal, that will help resolve the problem of non-uniformity of regulation between states, will finally be a reality in 2005, though there is still a question mark on the announcement of a National Power & Tariff Policy as envisaged in The Electricity Act. "For GQ, the issue now is only one of delay, and not derailment," says Sachin Mathur, Head of Research at Cris Infac. Almost half a dozen power projects may come in for financial closure in 2005, up from just one in 2004. Expect some movement on Delhi and Bangalore airport projects; Hyderabad is all geared up to move, even though Mumbai remains a gray area. But probably the best news is in urban infrastructure, integrated townships and the Special Economic Zones (SEZ) with close to $ 1-billion equity investments expected to pour in 2005. -Shailesh Dobhal Joint Ventures The latest salvo in the ongoing controversy over Press Note 18--a policy that denies foreign companies automatic approval for new projects if they have joint venture/technology transfer agreement in India-- has been fired by the Union Commerce and Industry Minister, Kamal Nath. Speaking at an august gathering of around 700-odd delegates, mostly businessmen from 33 countries at the India Economic Forum in New Delhi recently, he said that the government would announce amendments in Press Note 18, "which would be in the best interest of India businessmen while also ensuring that we are not unfair to foreign investors". He also added that the two parts of Press Note 18--one looks at the existing ventures and the other at future ones, "would be looked at differently''. That implies that the sections related to the existing ventures will be diluted while for new ventures no such permission will need to be taken. Nath's statement, like those of Finance Minister P Chidambaram's a few months ago before his trip to the US and UK, shows that the government too seems to be convinced about the restrictive nature of this note as it does not treat foreign players on an equal footing--Indian joint ventures do not have such legal restrictions--and hence is a big deterrent in attracting foreign direct investment. Analysts also point to the fact that a number of Indian companies have used this policy measure--issued on December 14, 1998 by the earlier NDA government--to drive a hard bargain with their foreign collaborators for extracting greater exit value or challenging the termination of the contract, which may be otherwise be legally or contractually valid. Thankfully, the move to dilute the norms is already garnering support from the industry. While Sunil Kant Munjal, Managing Director, Hero Group, believes that continuation of the note is important, it must be modified so that the interests of both domestic and foreign players are protected. Rahul Bajaj, Chairman, Bajaj Auto, is of the opinion that that even the existing joint ventures, should have a three-year sunset clause so that the interests of the shareholders and the interests of the Indian partners are adequately protected. "It would make things so much easier," he adds. As far as resolving the differences between the two partners are concerned, Bajaj is all for setting up a three-member special committee or any such mechanism, rather than have direct government intervention, since most of the differences are contractual in nature. -Ashish Gupta Kids That nearly a third of the country's population is under the age of 14 years, and more than half is under 24 years, is not lost on marketers. At last count there were seven television channels for kids, from global biggies in Disney to home-grown companies in United Television. And marketers across categories-from food, apparel, footwear, toys, personal care products and education-are busy catering to upwards of Rs 7,500-crore organised market for infants to pre-teens alone. For big businesses such as ITC, Godrej, Arvind, Reebok, Lee and Hindustan Lever checking-in into this kid market means an entry into a high-growth area, what with their traditional business segments trudging at best. Across the country play-school franchisees in Shemrock and Kangaroo Kids are mushrooming. And education advertising in coaching classes, computer education et al is one of the biggest advertisers in the Rs 4,500-crore print advertising market. And yet, in one sense, the market is still largely unexplored. If there is room for seven kids' channel, how does one explain just about no kid-centric films in India, even while 10-15 per cent of Hollywood's output every year is directed largely at kids! Think Harry Potter, Finding Nemo, Sherk, well even Lord of the Rings trilogy. Even in apparel, a category that had a relative success with kids, there is just no strong national school-uniform brand. Again, in advertising to this audience, it is categories not sharply targeted at the kids that have created the biggest pester power amongst them. Colas, and not milk-additives. Our young demographic is our global calling card, and yet we seem to be oblivious of it. We know that a much bigger outsourcing and onshore service opportunity awaits us, not just in areas of software & technology but in nursing, accountancy, et al. And yet we continue producing mind-numb ten-plus-two-plus-three graduates, who by default are fuelling today's BPOs, but with India's cost advantage eroding fast, it isn't time we retool our education and professional institutes to remain relevant to a fast ageing and expensive first world? -Shailesh Dobhal Lifestyle The consumer is king, right? Well, the Indian consumer seems to have been spending like royalty over the past 12 months, and nothing short of massive economic downturn, precipitated by an act of God will stop them. And more than just spending wildly, the spending has been driven towards buying products and services that reflect the changing aspirations, particularly of the Indian middle classes, from entertainment, to electronics, to travel. This is not an underlying trend, it is overt and in your face. While doing articles for the 'Back of the Book' section of this magazine, your correspondent saw the changing demands and lifestyle values of the new Indian consumer first-hand. They want the latest phones, the snazziest cars and the best clothes. Why else would brands such as Vertu (luxury mobile phones), LVMH, Christian Dior and Hugo Boss (set up shop in Indian)? Why is it that Nokia launches the Communicator in India before Europe? It is not just the clothes people wear and the phones people use, growing affluence is also visible on the roads of metropolises; luxury car sales have shot up over the past year. In the first eight months of the fiscal, over 20,000 cars in the D-segment and above have been sold in India, versus only 11,000 last year. It is not just cars, but also luxury apartments that is catching the fancy of the Indian buyer. Developers such as DLF and Unitech in Gurgaon are selling thousands of apartments annually within days of putting them on the market, and guess what, these condominium complexes have hardly an empty apartment in sight. The same thing is being replicated in cities, large and small, across India from Bangalore to Jaipur and Ahmedabad to Kolkata. Going to watch a movie is more that just watching a movie, a fact that Ajjay Bijli, CEO, PVR Cinemas has realised. "People want to go out and have a good time. It is a social occasion, not a place where you just sit quietly for three hours. Therefore we plan out our movie halls in such a way that there are options for our patrons to enjoy themselves both before and after a movie." Of course, PVR Cinemas themselves are evidence that the movie-going fad has been re-ignited. He expects to have another 50-odd screens up and running in the next fifteen months. Televisions, home theatre systems, DVD players are not pipe dreams anymore for consumers. According to Sahina Kidwai, Product Manager, Colour Televisions, Sony India, until last year, high-end televisions (29-inch and above) accounted for under 1 per cent of the market by volume, this year the number has shot up to over 5 per cent of the market. "Sales of bigger televisions have shot up this year and people are not just buying TVs, they are investing in projection-display systems and home theatres like never before," she says. And Indians are travelling more as well. Airlines have added hundreds of flights both domestically and on international sectors. Getting a ticket is tougher than ever before. It is on the basis of this boom that airlines like Air Deccan and Kingfisher Air are setting up shop. In the next 12 months almost 20-25 new aircraft are expected to be delivered in India. No wonder Airbus and Boeing officials are shuttling in and out of the country right now. Spas and hotels have also geared up to take advantage of the newly-found power of the Indian consumer. Hotel occupancy rates have remained sky-high across the country despite the addition of thousands of new rooms. The package-tour industry has never had it so good, witness the large full page adverts in all major dailies. Spas, both the in-city and destination variety, are seeing waiting lists of a few weeks. And of course, there is resurgence in the popularity of Golf, as courses pop up all over the country. Bars, nightclubs and restaurants too have been mushrooming across commercial districts at a frantic pace matched only by the insatiable appetite of the consumer. The Indian consumer has never had it so good, the choice of products has never been so varied, but then again nor has the power of the wallet. Or rather the power of the wallet borrowed from the finance companies. Every month, banks issue over 300,000 new credit cards, cover almost Rs 5,000 crore in new home purchases and nearly Rs 2,500 crore in new auto purchases. As long as the banks continue lending, no one can say the end is nigh. Of course, cynics will claim that this is a bubble waiting to burst and drag the Indian economy under with it. Here is hoping that the boom keeps on growing. Cheers. -Kushan Mitra M&As A year ago, $4.5 billion worth merger and acquisition (M & A) deals were done. Just as 2004 is winding down, the figure touched $ 7.5 billion as the companies jumped on to the fast-moving M&A express for a frenzied ride. And don't think for a moment things will slow down. The M&A pace could be even more intense in 2005 as companies set out on a shopping spree not just in India but also overseas. As the economic activity picks up and companies soak up excesses created and rationalize, in the next stage, says S Sriniwasan, executive director, Kotak Investment Banking, "there could be either capital investment or consolidation to build size and scale and bring in efficiencies". M&A activity will continue, "but in a much bigger way," concurs Vedika Bhandarkar, managing director and head of investment banking, J P Morgan India, which is already witnessing heightened dialogue with Indian companies and MNCs. Almost everyone agrees that banking is expected to be a merger hot spot. The finance minister has announced that PSU banks will consolidate. One or two PSU bank mergers are likely. There are talks of merger between Union Bank of India and Bank of India. Says S Subramanian, co-head of investment banking at Enam Securities:" In case of banking and telecom, writing is on the wall (about consolidation). " In telecom, smaller players are likely to get acquired. Textiles sector is likely to see increased din as the quotas come to an end, though some of the bankers felt that there might not be many willing sellers. Shopping overseas. There is a more emboldened IT industry looking for big acquisitions overseas. Adds Sriniwasan of Kotak:" There is high traffic from overseas companies in a variety of industries. These companies have checked out what's happening in India IT hardware, IT services as well as content for mobiles. Some of these visits will translate into action." Pharma companies too will witness action. And auto component manufactures could look overseas for acquisitions of distribution networks and use India as an export base. As for companies in the resources sector like oil and gas and metals and mining, with strong balance sheets, they will acquire mines or manufacturing capacities overseas to acquire global scale. And mind you it's not the big that will become bigger. The year 2005 is likely to see ripple effect on medium sized companies, who could go overseas to scout for opportunities. What's more, points out Bhandarkar of J P Morgan:" There would be larger interest from financial sponsors who have the capability to play a lead role in large deals. " With forecasters optimistic about the din and bustle on the M & A street, while investment bankers are all geared up to rake in the big moolah by way of fees, smart investors may well consider a portfolio of takeover bets. -Roshni Jayakar North-South Divide Any article on north-south divide is obviously open to criticism depending on the states that are taken into consideration. Something that even one of the authors of the report " State of the states'', Laveesh Bhandari of Indicus Analytics, himself agrees. However, any broad categorisation of the northern states will obviously include the bigger states of Bihar, Rajasthan, Madhya Pradesh and Uttar Pradesh. Similarly, any categorisation of southern states will include Andhra Pradesh, Kerala, Karnataka, and Tamil Nadu. And in this broad categorization BT has added Gujarat in the group of northern states and Maharashtra in the southern states group. But a study of the report shows that the northern states are clearly laggards in terms of economic as well as social indicators. "If the northern states are lagging behind their northern counterparts in agriculture, then it is because they are still using traditional methods of cultivation and using poor inputs- seeds and fertilisers,'' adds Bhandari Similarly, while the northern states may have bigger markets-in terms of size, they essentially cater to low-value products unlike the south, which has become a market for premium products. However, it is fastest-growing sectors of information technology, information-technology enabled services and business process outsourcing, that the southern states are clearly the overwhelming leader. "75 to 80 per cent of the total exports of IT, ITES and BPO comes from the southern states,'' contends Sunil Mehta, Vice President, NASSCOM, the association of software exporters. And if Mehta is to be believed, this leadership position of the South is likely to continue for many years to come. The reasons: southern states have a strong ecosystem -- presence of skilled manpower, good professional education and active state governments pushing the cause of their states--and the presence of few anchor companies. After all, Texas Instruments has had a presence in the south from 1984 onwards. -Ashish Gupta Offshoring One of 2004's hot button political issue was offshoring. From defeated US presidential candidate John Kerry - who called companies offshoring jobs as the new Benedict Arnold's (an American Jaichand) - to Uber conspiracy theoryists, who felt that after manufacturing jobs, US was being hollowed out in the services sector, Offshoring was a hotly debated topic in the year gone by past. It even gave raise to a new term 'Bangalored' to describe jobs being shifted to India. The Indian IT industry handled the issue in the way it should be, maturely. It ignored all the brohuhaha surrounding the issue and just focussed on what it does best. Providing value. In 2005 expect the heat to cool down. Election year rhetoric never lasts. Avinash Vashishta, Chairman and Managing Director of neoIT which is into offshore advisory and managament says "This debate actually helped India, as companies which had not thought seriously earlier started examining the benefits of offshoring. Offshoring is now mainstream. It provides organisations a comeptitve edge. In business logic defeats emotion in the long run. As long as offshoring remains a compelling business proposition by providing high value at low cost, it will continue." While there might have been some genuine apprehension in the West of the long term effects of Offshoring India cannot remain sanguine. Its advantages of highly skilled, english speaking, cheap manpower will not provide it a permanent edge. Already competitors like China (yes, once again India's bugbear), Philiphines and several East European countries and even Vietnam are snapping at its heels. China (which already churns out more engineers than India every year) is making large swathes of its populace learn English as a part of its national mission (for the 2008 Beijing olympics), while countries like Philiphines and Vietnam are competing on cost. East European countries like Romania and Poland have the 'near-shoring' advantage. India definitely has had a headstart in the offshoring game, but it will have to work hard to keep its edge. 2005 will thus be year of consolidation. -Venkatesha Babu Pharma A product patent regime, fate of mail box applications and their fall out, changes in Indian GMP norms, way ahead on the drug pricing policy. With the ushering in of the new year, drug manufacturers are still unclear which way things will fall. ``The year 2005 seems to be a hazy year with many uncertainties,'' says S.V. Veerramani, Vice President, Indian Drug Manufacturer's Association. Come January 1, 2005, India will, hopefully either though a legislation or an ordinance (and in accordance with the TRIPs aggreement), make a transition towards a product patent regime as against process patent regime at present. What this would imply is that products derived from all patent applications submitted or granted after January 1, 1995 cannot be reverse engineered in the new regime. Add to this, the new year will see changes in guidelines relating to GMP (good management practices) or the "schedule M amendments'' and this could hit many of the SSI units in the country. The Indian pharma industry incidentally is quite fragmented with the total number of pharma units in the region of 20 to 22,000 and bulk of this is small players. Says an official from the Central Drugs Control Organisation: ``There are not more than 9,000 units in all and 80 per cent of these are from the SSI sector and have about 10 per cent market share and the balance 20 per cent of units have the remaining marketshare.'' "The total production environment has now to be controlled and this has been elaborately defined now," explains M. Venkateswarlu, Dy Drugs Controller (India), Central Drugs Standard Control Organisation. In simple terms for SSI units it would mean more costs as for instance, window air conditioners will not be allowed in a plant and there would have to be air controlled system, which could mean a minimum investment of Rs 50 to 60 lakh, there must be additional investments on water treatment or for a ``validated water system'' and the complete plant would have to be redesigned. But from the point of regulations relating to patent protection, the start of 2005 also means worries for some or opportunities for others in terms of the likely impact of the mail box provision. Consequent to TRIPS, its a provision under which all countries that did not offer product patents for pharmaceutical and agricultural chemical products as on January 1, 1995 had to provide a means for accepting applications for such inventions (called the 'mailbox'), apply applicable priority rights and provide exclusive marketing rights (EMRs) for such products. "What will happen when the mail box is opened is a major concern at the moment as there could be cases where players are granted patent protection in India for 20 years even though they are out of patent abroad. What would happen to companies manufacturing these products, will royalty have to be paid or will they be withdrawn,'' says Venkat Jasti, who until recent was the president, Bulk Drug Manufacturers Association (BDMA). On the whole, not many see any short to medium term earnings impact on domestic businesses. But most certainly over a longer term (over a five year period) the industry could be for some major changes. What will be watched going forward starting 2005 would be: the growth possibilities and growth rate of the industry, the manner in which the MNCs would view the country and the global players assessments of the price/volume mix and on making India another region where mega brands could be built, the strengthening of the outsourcing trend, number of players who may constinue to exist and the export orientation and the emphasis among Indian players to invest in research. Then there will be as always the issues of drug pricing. For pharma the take off is expected from 2007 onwards. "The Indian pharma market is expected to grow from around $6 billion at present to between $15 to $18 billion by 2010 and in the next 3 to 4 years the total number of serious players could reduce by as much as 50 per cent,'' says Jasti. A Mumbai-based analyst, on the other hand, adds: "The growth in domestic sales may remain in single digit and would grow from around 7 per cent at present to 9 per cent, however growth in net profit for the industry as a whole (including export) could be in the region of 18 to 20 per cent.'' Finally, while more players would be increasingly focussing at tapping the generics markets opportunities in the US and aligning their growth strategies to cash in on the growing outsourcing/offshoring boom, the industry continues to be hit by what could at best be described as price undercutting. But then, as Dr. Reddy's Laboratories Executive Vice Chairman and CEO G.V. Prasad says: "In a commoditised market one cannot wish away price competition.'' -E. Kumar Sharma Quiet Period The current primary markets boom is set to spill to 2005 as well. "Around Rs 10,000-12,000 crore is expected to be raised in the first 3-4 months from the Indian capital markets", says S. Ramesh, Executive Director - Equity Product Group, Investment Banking, Kotak Mahindra Capital. That means, the Indian companies are hard pressed to remain quiet during those "quiet periods". In addition to this, there are several overseas offerings (in the form of GDR, ADS, sponsored ADS, etc.) also lined up, forcing companies to follow similar regulations there as well. How are Indian regulations placed compared to developed markets? "Quiet period regulations in India are stricter compared to US markets", says Ramesh. For example, the quite period starts here when the offer documents are filed with the Sebi, while it is just 15 days of pre-issue in the overseas market. Sebi has taken steps regarding the other aspects of corporate governance as well. For example, companies now are supposed to follow corporate governance practices (based on the recommendations of Narayan Murthy Committee) as per section 49 of the listing agreement with the stock exchanges. Stricter corporate governance regulations are one thing, but do Indian companies comply with these regulations in letter and spirit? For example, the recent revelations (that too only in the form of leaks) from the Reliance Industries have raised serious corporate governance issues. And its seriousness is increased because several group companies have big weights on major indices (like Reliance Industries, Reliance Energy and IPCL in NSE Nifty). "Though we have positive outlook on Reliance stock based on the sum-of-the-parts fundamental valuation, we still don't know how the ownership issue in Reliance would be eventually sorted out in entirety. As collectively the group has about 10-11% weightage in Sensex/Nifty, in our opinion, it could be the biggest event related risk in the market now", says Amitabh Chakraborty, Vice President and Head of Research, Private Client Group, Kotak Securities. The authorities have taken note of this and Sebi in a closed door meeting with BSE and NSE has asked them to look into these issues. But corporate governance can also be imposed by a vibrant "free market" and it is happening slowly in India as well. For example, with the increase in foreign holdings (either through overseas listing or FII investments), Indian companies are hard pressed to follow the corporate governance rules more diligently. This is because the foreign investors are more sensitive to corporate governance issues. "Investors usually are ready to pay higher valuations to stocks (like Infosys, HDFC, etc) that are ranked high in the corporate governance scale", says Andrew Holland, Chief Administrative Officer and Executive VP - Research at DSP Merrill Lynch. -Narendra Nathan Retail "FDI or no FDI?" will be the question on every retailers mind as they ring in 2005. To understand why foreign direct investment (FDI) in retail - something the government now seriously contemplates opening up - has some salivating and others grimacing, take a look at these numbers. The Rs 22,500 crore organized retail sector is growing at a rate of 8.5% plus. About 25 million square feet of organized retail space is expected to come up by next year and global consultancy A.T. Kearney already ranks India fifth among the world's 30 emerging retail markets. Numbers aside, it's the changing consumer psyche that has retailers like K.N. Iyer, CEO, Cross Roads Mall, upbeat: "As their pockets fill up, consumers are turning into bigger risk-takers, be it investment, employment or purchase. As a result Impulse decisions have now also entered big-ticket shopping, something unheard of before". Today, it looks like there's no stopping retail. Even the paucity of quality real estate, for long the singe largest constraint to growth, has now been resolved with the proliferation of malls. With consumer spending growing by 11.5% over the last decade, stock markets buoyant and the economy in general picking up, retail's second wave is being aptly driven by apparel, food & beverages and organized grocery. Thus, be it homespun brands like Westside, Pantaloons, Shoppers' Stop, which are helping apparel notch up a 9.5% average yearly growth rate or coffee house chains like Barista and Café Coffee Day which are already estimated to have crossed the 450 outlets mark. And then there is the most visible face of the retail mania - glass and concrete malls. In Bangalore alone an additional five million square feet of space will be added - the equivalent of 45 football fields of shopping space. Moving onto the FDI debate, open market proponents say FDI shall not only bring in fresh investment, generate employment (specially in the semi-skilled category), but also promote a more efficient supply chain by cutting out middlemen. On the other hand, local businesses feel that this will only give multinationals with deep pockets an unfair advantage and wipe out often painstakingly built mom-and-pop business and Indian chains. Reality though may lie somewhere in the middle. While there may be some degree of displacement, mom-and pop stores will be far from wiped out and for the potential, even if partial FDI is allowed. One only needs to look at China, where only 49% foreign holding is currently permitted, but four of the world's largest retailers led by Wal-Mart have already set up shop. So what does the next few years have in store? Well it'll be growth both in terms of breadth and depth; hyper markets, discount stores, supermarkets, department stores shall all proliferate. Says Arvind Singhal, Chairman, KSA Technopak: "The inflexion point would be sometime in 2006, when modern retail formats shall begin to make a very significant impact not only in the metro towns but other top 20-30 cities and touch a wider range of consumer goods sectors." Private labels promoted by assorted reatiling powerhouses are also expected to find favour with the value conscious Indian customer. And as outlets proliferate so will competition. Consumers will need to be lured with exciting new products and brands, as well as newer and innovative retail-formats. The mood is summed up by Krishna Ramanathan, Country Head, Sara Lee Apparel India - subsidiary of the $20 billion Sara Lee Corporation that just set up shop here: "There's plenty of room for everyone. The Indian retail market's just warming up." -Abir Pal Stock Market With the Sensex hitting all time peak once again, stock market in India is looking at the year 2005 with a lot of hope. And what are the factors that will drive it (from the current levels)? Economy: The overall Indian economy is in good shape now and is expected to remain like this for a couple of years more. "We expect the Indian GDP to grow between 7 and 7.5 per cent next year (ie 2005-06)", says Andrew Holland, Chief Administrative Officer and Executive VP - Research at DSP Merrill Lynch. And as usual, the corporate earnings growth rates are expected be much more. "Nifty companies' earnings for the financial year 2005-06 will grow by 16-17 per cent from a high base of 2004-05. The earnings growth could be higher if the proposed tax cut for the corporate sector materialises", says Amitabh Chakraborty, Vice President and Head of Research, Private Client Group, Kotak Securities. Another saving grace is the sustainability of the low interest rates regime. "With the massive foreign fund flow continuing, the interest rates will remain at around current levels (around 7 per cent) for some more time", says Raamdeo Agrawal, Joint Managing Director of Motilal Oswal Securities. And the fund flows: Admit it, the present rally is mostly because of the FII fund flows (a whopping $8.18 billion this year - ie till December 21) to India and therefore can be sustained only if more money flows in. Though it is very difficult to say the exact quantum, most people are optimistic that the FII inflow will be more than what we received in 2004. Dollar continued to be weak against other world currencies, which will help generate enough fund flows for emerging markets including India. The expected further increase in FII limits will help to increase the free float factor. And the several new entrants (like CalPERS) are pension funds that are committed for long term. The targets: As both these factors are favourable now, how much more can the Sensex go in 2005? "It should reach 7,000 in 2005", says Holland. "On a conservative estimate, it could reach 7,200 by the end of 2005", says Amitabh Chakraborty. "The upside potential is huge and the Sensex is expected to be in a band of 7,000 - 8,000", says Nandan Chakraborty, Head of Research at Enam Securities. Sectors: And the sectors that are expected to generate interest in the next year? With the consumer boom continuing, sectors like auto (four wheelers), hotels, FMCG, etc should do well. And the infrastructure thrust should help sectors like cement, power, etc. The start of new investment cycle will help banks and engineering companies. Risks: But that doesn't mean that the market will continue to go up without any corrections. And as the market has entered uncharted territories now, it is only natural to expect very high volatility. "To reach a mountain peak, you have to climb up and down small hills", explains Chakraborty. And we are heading for an eventful quarter and the most important event everyone is watching now is the Union Budget. Though everyone expects a good budget, will it drive the market upwards? "To get credibility for the new budget proposals, government has to implement the promises made in the last budget (like increase in FDI)", says Agrawal. -Narendra Nathan Textiles While the year 2005 is a significant one for many other sectors, there is little doubt that the face of Indian Textile industry will never be the same again. The dismantling of the 40-year-old quota regime on January 1, 2005 will not only open a world of opportunity but also pose challenges in plenty. And as S P Oswal, Chairman of Vardhaman Group, rightly points out, "One needs to take stock of the challenges before looking at the opportunities." The lifting of quotas means that competitive market forces will finally drive the global textile trade. It would also end the artificial inefficiency created between the buyer and the seller. And Indian exporters can now realistically hope to increase their 3 per cent share of the world textiles and clothing market. However that largely depends on how India Inc will handle the challenges to capitalize on the opportunities. The outcome of this battle will largely depend on investments that the industry can mobilize for the next three to four years. In the current year the Indian textile industry has invested less than $1 billion as against China where the figure is close to $10 billion. "We need to invest at least $4 billion every year for the next three years to have any significant presence in the global market," asserts Oswal. That said, the dismantling of quotas would ensure flow of money in the sector once profits begin to generate. A vibrant capital market and entry of entrepreneurs in this sunrise sector is soon expected. Already the Vardhaman group is being approached by 10-12 premium fund agencies. Darshan Mehta, President Arvind Brands, who compares the year 2005 for textiles to a "planet changing its orbit," cautions against all false hopes. While differentiating consumer durables from garments that are artisan products with crucial quality standards Mehta rules out, "any overnight relationships with key buyers." He however does emphasize that vertically integrated players will have a definite advantage over others. Considering every single large buying house is under the mandate to reduce its vendor base by 2/3rd the next 12-24 months will see faster growth for the forward integrated players in the value chain. The small size of key players and the hugely fragmented industry is a cause of concern for experts like Yogesh Malhotra, Research Analyst, ICRA. "Infrastructure constraints hit the small players more and too many outfits reduces the bargaining power". And how big really is the China factor? Experts believe that between India and China it is not really an "either or situation". At present out of16 apparels made for every human alive China makes four, whereas India can only boast of a four per cent market share. China is expected to double its global market share from 25 per cent currently to 50 per cent by 2007. However countries like India can leverage the fact that most developed countries may not encourage China to be the only supplier and would prefer a more differentiated supply chain by effectively derisking. Also developed countries like the US can impose some quota restrictions on China considering it entered the WTO agreement rather late in 2001. "But one thing is for sure", says Mehta confidently, "Whenever the churn happens island economies will vanish". Some of the factors that can work to India's advantage are exclusive to the country and can help tap emerging opportunities. It has a good raw material base and also the potential to double its annual 3 million ton production in the next five years. Long experience in textile and trained manpower will be an asset in this labor-intensive industry. And most of all the huge domestic market makes it easy to launch externally. And the infrastructure nightmares? "That has to improve but the situation can only get better from here." Mehta like the industry is rather optimistic. -Supriya Shrinate Unions The Reds are turning corporate! Believe it or not, the Centre for Indian Trade Unions (CITU), the trade union wing of the Communist Party of India Marxist, CPI (M), is actually setting up three institutes "to train working class leaders on the role of trade unions in the present era". The first of these institutes, called the P. Ramamurthy Trade Union School, will come up in Delhi soon, complete with boarding facilities. So, are B-schools about to face some blue-collar competition? Unlikely, but it does point to the winds of change blowing over the red establishment in India. West Bengal Chief Minister Buddhadeb Bhattacharjee is on record calling bandhs "a disease for which we must find a doctor". And even as the central leadership of the CPI (M) mounts pressure on the Manmohan Singh government to enshrine the right to strike by government employees in the statutes, Shyamal Chakraborty, national Vice-President of CITU and President of its West Bengal state unit, echoes Bhattacharjee's conciliatory tone. "Strikes are a weapon of last resort. They should be used only after all other options have been exhausted," he says, adding that his organization does not support "irresponsible trade unionism". Bhattacharjee has already struck the first blow: He has declared information technology an essential service, exempting it from the purview of bandhs and strikes. "Liberalization and globalization have brought about a paradigm change in production processes," says Chakraborty. "Labour intensive industries are being replaced by capital intensive ones. More people are shunning regular jobs and, instead, running small businesses out of their homes. To remain relevant, trade unions have to take these trends into account and reinvent themselves." His tiny air-conditioned cabin at the West Bengal CPI (M)'s Alimuddin Street headquarters in central Kolkata - and the PC on his desk - bears testimony to the changed times. "It's quite cold; do you mind if we don't turn it on?" he asks apologetically, pointing to the window AC, at the start of the interview. A moment later, Chakraborty relapses into familiar Marxist rhetoric, saying CITU will continue to remain at the vanguard of the working class movement. "Taking advantage of the new realities post-1991, managements are pushing workers against the wall. We will continue to protest against this and other anti-people measures like the sale of profitable public sector units," he asserts. Ask him about foreign direct investment and voluntary retirement schemes, and he says CITU is comfortable with both so long as the country's security and workers' futures are not compromised. Clearly, it's not easy to square the imperatives of being investor-friendly in one state with the political necessity of sounding revolutionary in the rest of the country, where it exists only in pockets. "Workers are as much a stakeholder in the production process as managements," says Sanjiv Goenka, Vice Chairman of RPG Enterprises and former Chairman of the Confederation of Indian Industry, putting India Inc's views in perspective. "One cannot survive without the other. We will go forward only when we recognize this and the realities of the global situation." The two ends of the spectrum seem to be coming closer; and shrill rhetoric is giving way to reasoned arguments. That's a good point for co-operation to begin. -Arnab Mitra Venture Capital 2004 is one year private equity players will not forget in a hurry. As Ashish Dhawan, Senior MD, ChrysCapital, succinctly puts it: "It was a landmark year. We not only emerged as an important asset class but also proved that as an industry, perfectly competent to stand our own". And the celebrations it seems will extend well into 2005 and beyond. Says Renuka Ramnath, MD & CEO, ICICI Ventures: "The numbers are expected to grow multifold. A pipeline of $2 billion-$3 billion over the next 18 months is well within reach." Of all the billions expected to flow in, private equity shall hold sway accounting for over 85%. Most long timers like Actis, Barings, Westbridge and ICICI Venture who've all weathered the stormy early years of this millennium are now said to be "raising additional capital". And it's not just the quantum of funds; even the number of deals and diverse sectoral investments points towards a coming of age for private equity. And as the global aspirations of Indian companies grow , so will their appetite for acquiring international companies and operation. Opines Pravin Gandhi, Director, Infinity Technology Investments: "A large chunk of growth capital is needed by mid-cap companies specially in segments like auto components, design R&D and life sciences and private equity is ideal for filling this vacuum." But its not that venture capital is altogether dead and buried. Saturation and maturing of technology startups -traditional hunting of venture capital funds -and lack of specialized players to invest in emerging technical domains like biotechnology and life sciences is said to be the reason for the slowdown in VC's. But with as many as 60-70 representatives; primarily from US-based venture funds visiting India in the last one year, even if a small fraction of these translate into a presence here, it shall add up to a lot of money. The top large national and international firms will continue to hold sway and be involved in all the big-ticket deals. Many see the emergence of specialized funds for infrastructure, real estate. With the bull run continuing many companies may go public and there is expected to be an increase in cross-border investments as well. Buyouts are going to become commonplace with more and more large companies warming up to the idea. Differentiation is going to be crucial. Says K. Ganapathy Subramanian, Managing Director, Jumpstartup a Bangalore based fund- "The colour of money is no longer important. Funds will try to stand out by offering differentiators like the quality support they offer, the expertise they bring to the table, depth of managerial talent on tap and accessibility to emerging markets." For others, in the world of private equity -which broadly invest for the longer term anything between $7-$8 million in companies with turnovers of over $25 million- a year is too short a time to change one's mind. Says Abhay Havaldar, Principal, General Atlantic Partners- "We continue to be optimistic on companies we term producers and consumers of technology and shall maintain status quo." -Abir Pal Wheels The calender year 2005 is likely to be good for the auto industry. Though the year will not see the startling percentages of growth witnessed in year 2004, analysts and market research reports published by Frost & Sullivan continue to predict an encouraging growth. This, despite the impact of fuel increase, an interest rate increase and the inevitable price increase (in cars) anticipated in 2005. While fiscal year 2003-2004 was excellent for the auto industry which boomed because of a good amount of excise cut benefits being passed on, the reason for growth for 2005 is not likely to be this (even if there are budget announcements pertaining to this). The hike in steel price in the past, the increased cost of technological upgrading to Euro 3 norms, the unending promos and discounts offered in the past will see the manufacturers not passing on the benefits of more excise cuts. Rather after two years of maintaining price, and a slew of launches in 2004, one can expect further price revisions upwards in the new year. For 2005, the bottom line growth will not be in tandem with topline growth for auto manufacturers- but the volumes would still ensure tidy profits. With the economy doing reasonably well, personal transportation segment will grow in 2005, at different percentages for different segments. While growth in passenger car sales for calendar year 2004 was up 23.65 per cent to touch 1.03 million (from 840,000 cars sold in 2003) year 2005 will see a 15 per cent increase on this. Two-wheelers too have to face the Bharat Stage 2 norms in 2005 (these are equivalent to Euro 3 in terms of stringency and standards in line with global trends) but are well geared to this by orienting to four-stroke technologies. For the two stroke vehicles that remain in the market, it would be more expensive to upgrade, but not greatly difficult (in fact two-stroke vehicles have their own inherent advantages ). Two wheelers saw a 15.16 per cent increase in unit sales in 2004 (5.9 million units as against 5.1 million earlier) and will probably see a 10 per cent growth in 2005. Different analysts vary in their estimates of growth but the variation is slight. S Krishna Kumar senior analyst with m Sundaram Mutualfeels that there would be a 15-17 per cent growth in passenger car sales and MUVs, and 13 to 14 per cent growth in two wheelers and 30 per cent growth in tractor sales., 8-10 per cent in 3 wheeler sales. Automobile exports are set to grow steadily. Ford's exports of 3000 CKD units per month to South Africa, Mexico, Brazil is expected to incerase, Maruti has done well (particularly the Alto model)in Europe (51,172 units in FY04) and more to follow. Hyundai will be exporting its Santro wholly from its Indian facilities (50,000 units per annum), Tata Motors is planning to sell at least 20,000 units of only diesel cars in Europe while General Motors is investing $ 21 million towards its Asian R & D hub, located in Bangalore. Auto components are expected to ride on the back of automobile sales. With commercial vehicles having higher cost components and 12 to 15 per cent of the OE market is related to CVs, component manufacturers are well placed in the domestic front.. The aftermarket too will grow 10 -12 per cent . The CV market is estimated to grow at 17 -19 per cent for the next calender year with the light commercial vehicles selling more units. Exports in the auto-component industry too would see a 30 per cent growth and would largely involve primary conversion or at best two stage conversions, again more in the aftermarket. Value-adds will come from companies largely having technical partnerships with overseas companies or joint venture partners. Two examples of these would be Pricol and Sona Koyo Steering. But the auto ancillary industry is busy with its capex plans to meet export demand. In fact most of them haven't yet gone for intensive R & D investments on account of the costs and are awaiting the setting up of a fund which would make soft loans for this purpose. In terms of capex planned, some examples that immediately come to mind; Sundram Fasteners Rs 80 crore, Wheels India Rs 75 crore, Sundaram Clayton Rs 100 crore, Pricol Rs 25 crore, Mico planning around Rs 500 crore, Bharat Forge already completed Rs 250 crore , a host of others are planning investments of anywhere between Rs 20 and Rs 40 crore. ACMA predicts a minimum of $ 2 billion by way of exports by end of next year. In general the auto component industry will be focussing 50 per cent on the OE , 25 per cent on the aftermarket and 25 per cent for exports. A Frost & Sullivan report goes into the nuances of personal transportation. In cars, the A segment (which is cars under $6700, Maruti 800 and Omni)) there is likely to be a degrowth in the following year. Fiscal year 2005 will see a degrowth of 6.7 per cent while the following fiscal year 2006 will see a degrowth of 6 per cent. The fiscal year 2004 being exceptionally good for the automobile industry actually saw a 15.1 per cent growth in this segment. The whole of calenderYear 2005 will therefore see a degrowth in this segment which will increase progressively. The `B' segment (price above $ 6700 to $11,000 the Palio, Alto, Santro, Ambassador, Zen, Wagon R, Indiaca)on the other hand will see a growth of 25.2 per cent in fiscal year 2005 and 16 per cent in the following fiscal. The middle of calender year 2005 is likely to witness a slowdown in tempo. The `C' segment (price above $11,000 to $ 20,000 .Ikon, City,Accent, Esteem, Lancer, Corsa, Indigo) having seen a growth of 52 per cent for fiscal 04, is likely to become slower to 20 per cent by fiscal 2005 and to 14.5 by fiscal 2006, back to the levels of fiscal 2003. Calendar year 2005 would see a growth tapering in the middle. Likewise the `D" segment (above $ 20,800) Chevorlet Optra, Accord, Sonata, Skoda, Camry, mercedes, Corolla, Elantra etc will see similar trends - after clocking a growth of 26 per cent in fiscal 2004, there will be a fall to 15.4 and 10.5 per cent in fiscal years 2005 and 2006. Nevertheless, unlike the `A' segment there will not be a degrowth in any other segment . Sales in the `B' segment will continue to dominate the market in 2005 with models such as Tata Indigo straddling the `B' and `C' segments driving sales, while sales in the `D' segment are anticipated to be driven by newer models from Honda and Ford. The economy cars of `A' segment are expected to enter semi urban and rural markets. Growth in the `C' and `D' will be affected partly by the increasing number of launches in the higher end MUV and SUV segments. The `B' segment will also see increased percentage of sales in the diesel segment (in FY04 the share of diesel cars in this segment was 23 per cent). Maruti is setting up a diesel plant in association with Peugeot (France) to manufacture 100,000 units per annum. Hyundai already has the diesel version of Accent while Ford too will be coming out with its Fusion version. Used car sales (the average ownership of a new car which was five to six years in FY 03 is likely to come down further in 2005) will increase in rural, semi rural reas and those wishing to opt for second car in metros or upgrading from two-wheelers. Companies such as Maruti,Ford, GM, Mercedes-Benz have entered the market with their branded range of services in this segment with product and service warranties. Growth in this segment will not be rapid, but remain medium. Two-wheelers; The two-wheeler segment like the car segment is likely to witness slower growth for fiscal 2005 and 2006 (12.7 per cent and 12. 1 per cent respectively) compared to 15.6 in fiscal 2004. Calender year 2005 will therefore see an average of 12.3 per cent in terms of growth. Unit sales of motor cycles which constitute 77 per cent of all two-wheeler sales are likely to go up even more next year, eventually to 83 per cent by fiscal 2006. Hero Honda,, Bajaj Auto, TVS Motor will continue to dominate the market with 88 per cent in FY06. The executive segment is expected to continue being the largest selling segment. Bajaj's K-60 is expected to do well, while TVS' Centra is expected to cannibalise the Victor. Hero Honda's CD Dawn is still predicted to be a favourite in the entry segment, but Bajaj is not one to keep quiet. The introduction of the TVS `Star' is expected to make some gains in the lost `Max' 2-stroke segment while Bajaj's `Pulsar' is likely to face competition from Honda Motyorcycle 's new launches. Motorcycle sales are also expected to be driven by slightly higher exports in the next calendar year especially from Bajaj Auto. Geared scooter segment which have been seeing degrowth for several years including the turn of the this century will further see a degrowth in terms of sales for fiscal year2005 and fiscal year 2006 - 15.0 and 16.3 per cent.. Sales of ungeared scooters are expected to come down in percentage terms from 26.9 in fiscal year 2004 to 14.1 and 9.8 in the fiscal years 2005 and 2006. Still the share of ungeared scooters in the total two-wheeler sales (around 11.5 per cent now) is expected to creep up though very slowly. Multi-utility vehicles for personal transportation segment are also expected to do well thanks to the various model launches. While fiscal year 2004 had a growth of 64.8 per cent, fiscal years 2005 and 2006 will see 29.4 per cent and 23.3 per cent. Calendar year 2005 will continue to see growth in the rate of more than 22 per cent. M & M's Scorpio is expected to dominate the segment with a market share of 43 per cent in FY06 followed with close competition from GM's Travera. -Nitya Varadarajan XXX Stuff One senior newspaper editor recently remarked to this correspondent that it would take an 'incident of monumental proportions' to knock the Ambani brothers off the lead headlines of the daily newspapers. In Delhi, that incident was not a horrific train collision in Punjab that killed 34 people but a 157-second long clip of two sixteen year old school students, well, 'having fun', so to speak. The so-called 'MMS (multimedia message) scandal' (MMS-gate anyone?) has taken the capital and now the country by storm, and still (at the time of this issue going to press) dominates the headlines in mainline newspapers and the TV networks. Following the arrest of Baazee.com CEO Avneesh Bajaj, who frankly is only guilty of a bad accent, it now has the makings of a diplomatic incident, with the US State Department getting involved (Bajaj holds a US Passport). All just because a juvenile wanted to show his friends that he had enjoyed some 'action'. What is even more peculiar is that this is not the first such incident in the country. A few months ago, a beauty pageant winner from the northern city of Jammu was arrested because a tape of her having 'conjugal relations' was leaked onto the internet. In both cases, what is particularly surprising is the fact that people involved in the 'act' have been remanded to custody, thanks to the over zealousness and prudishness of the authorities. The law in India is quite strange, dealing in pornography, that is the act of selling them for a consideration of money is illegal, watching it, thankfully is not. When VCD players became the rage two years ago, the industry flourished in places such as the underground market (literally) at Delhi's Palika Bazaar. A 'blue film' is available at such places for as little as Rs 50; by the way these are the same guys who sell pirated software. No matter how often the police raid such places, they spring up again within hours. You can't really call these people perverts, they survive because there is the demand. And the market is huge. People were willing to pay Rs 125 for a short clip; you can imagine what hell would break loose in case a high-quality video ever made it onto the market. How much is it worth? Hazarding a conservative number, and not including actual physical transactions, the trade would be worth at least Rs 1,000 crore nationwide. Even though the likelihood of the so called 'DPS Dhamaka' clip ever having been an MMS is unlikely given its size (1.3 megabytes) coupled with the malignant network congestion in the capital, it would most probably have been transferred either through Bluetooth or a data cable, but that is semantics of the technology kind. The fact remains that with increased technology and a sex hungry populace such incidents are going to increasingly make it to the public domain. What will make things worse is increased internet penetration. Let us make no bones about it, the most profitable sites on the internet deal with the realm of pornography. In fact, all you really need to do to find porn on the internet is to disable 'Safe Search' on Google or any search engine for that matter, a 10 second process. Some social commentators have called for a 'war on pornography'. Frankly, any war on a noun (war or terror, war on drugs) is eminently un-winnable. So, what are the ways out? To borrow a line from marijuana campaigners, 'Legalise It', it would be far easier to control and you could make some tax revenues on it. Secondly, change laws so that Service Providers do not get caught in the trap of being purveyors of porn, because frankly by the logic used for Bajaj's arrest, the heads of all Internet Service Providers and their bosses (who pray are the people in charge of the state-run telecom companies?) should be in jail. So should the owners of at least one prominent Delhi daily who advertise 'massage services' in their classifieds day in and day out. There is another problem here, which technology companies would need to address. A Parliamentarian recently told this correspondent that Indians were not ready for high-technology and that camera phones should be banned. Even though such draconian measures would be the height of stupidity, education would not. Any technology would always present itself for misuse, but educating people would hopefully reduce and minimise such misuse. And then there is education itself, for gods sake teaching kids about 'the birds and the bees' is not a bad thing at all, in fact hopefully if they knew they would not take videos of themselves screwing around. -Kushan Mitra Yellow Fever It was a small news item tucked away in one of the inside pages of the national dailies that could well have escaped the attention of most readers but had great national significance. The news: Sino-India trade had already crossed the $10 billion mark in the first 10 months of 2005 and that India was enjoying a positive balance of trade position with the Asian behemoth. While Indian exports to China were to the tune of $6.27 billion, imports were around $4.56 billion. Something that would have been unthinkable even a few years ago when the "Made In China" tag made India industrialists see red and virtually forced the government to launch a host of anti-dumping investigations against the Chinese players. Moreover, the two countries have started work on signing a bilateral free trade agreement as well as a comprehensive economic cooperation agreement to cement their booming commercial ties. Says Arvind Virmani, CEO, ICRIER, and a member of the Sino-Indian Joint Study Group, formed to work out the modalities of such an agreement: " While the FTA may be some years away, the signing of comprehensive trade agreement (read preferential trade agreement) may well be on the cards in 2005.'' So how did this changed mindset come about? As Virmani points out, Indians have not only learnt to respond to the Chinese challenge but also leverage it for their own benefit. Since the late 1990s, fear of China has been replaced by a sense of opportunity. Now that the expected domination of Indian manufacturing by aggressive, low cost Chinese manufacturers has not happened, India Inc. has learnt to take advantage of the country's low costs and superior infrastructure to tap not just the local market, but big neighbourhood markets as well by setting up manufacturing bases there. There are other positives too. The Chinese government provides land at concessional rates, gives 100 per cent loans for construction, tax holiday on the first two years of production, provides power at one-third the cost of India, and allows foreign companies to tap into the huge domestic market by just paying 7 per cent value-added tax. While most investments in China have been made been in pharmaceuticals (Ranbaxy, Dr Reddy's, Orchid Chemicals, Aurobindo Pharma), automotive (Bajaj Auto, Lucas-TVS, Sunderam Fastners), electronics (Videocon International) and electricals (Bajaj Electricals), packaging (Essel Propack) and software (NIIT, Tata Consultancy Services), the most recent move has been made by Tata Motors, which has signed an agreement with Brilliance China to study the feasibility of exporting cars to the Dragon Kingdom. And that list is just growing. As Venugopal Dhoot, Managing Director, Videcon International, who has set up an internet TV manufacturing cum R&D centre in Shanghai, says: " The Shanghai proposition is simply irresistible.'' Beside the opportunity factor, India also must enter into a preferential trade agreement route with China only to see that its exports do not get outpriced in one of the fastest growing economies in the world, says Sunil Kumar, Senior Manager at consulting firm Ernst & Young. With China having already entered into a trade pact with the Association of South East Asian Nations (ASEAN) and also with the US, there is a chance of Indian products being outpriced in the Chinese market because of higher duties. That's one mistake that India just cannot afford. Secondly, as a recent study by the Delhi-based industry association FICCI shows, there is still huge scope for exporting software, gems and jewellery, processed minerals, steel, generic drugs, processed films, etc., to China. "So why lose out on this opportunity?" queries Kumar. But then, what are the downsides of doing trade with China? Firstly, as an analyst points out on the condition of annonymity, China is still not a market economy in the true sense of the word. Hence there is still apprehension that the government (read the ruling party) of the People's Republic of China can intervene anytime and change the trading rules thereby hurting India's interests. Secondly, the threat of dumping of cheap Chinese goods still persists--India has 66 anti-dumping cases against it. But that could well be taken care of by drawing up a sensitive list as is being done in the case Thailand, where a free trade agreement is already in place, or having a safeguard mechanism in place. -Ashish Gupta Zealots First things first. India has reached a stage in liberalisation where there is no going back. Even though the zealous anti-reformists like the Left has become a part of the ruling United Progressive Alliance (UPA), the fact is economic reforms will be pretty much on any government's agenda in India. The BJP-led NDA government was focused on reforms even though it was under pressure from groups like Swadeshi Jagran Manch opposing initiatives in disinvestment, labour reforms and globalisation. Despite the noises by anti-liberalisation lobbies, the year 2005 will mark a watershed in India's move towards a fully liberalised economy. The patent regime will come to full effect from January 1, 2005 and so will the TRIPS agreement on trade in services, also the much awaited labour reforms may take shape finally. Outside the WTO issues, Privatisation of water is a big reform the government is expected to initiate. So if the itineraries of the anti globalisation lobby in India appear busy for the year 2005, it is not without a reason. The anti globalisation lobby has been active ever since reforms were initiated in the country way back in 1991. Now with the Left playing a significant role in the government the resistance perhaps assumes more importance It is an eventful year for the anti-liberalization group no doubt, as Nilotpal Basu, leader of the CPI (M) in Rajya Sabha, says, "It marks the resistance of people against adverse impact of new liberal policy in many parts of the world". Privatisation is one of the key reforms that this lobby looks at blocking and may have possibly succeeded to an extent. Under the present government there is no privatisation going on and economists like Surjit Bhalla, President, Oxus Investments, believe that there is not much opposition to whatever little government ownership is being divested now. However resistance against the agriculture issues under the WTO is far more vociferous. Also the seed and medicine monopoly as a result of the patent regime coming into effect is likely to stir a fresh debate. "2005 will be a year of responding to the WTO and World Bank driven policies entering the lives of ordinary people, and will be time for greater mobilization," says Vandana Shiva, Environmental Activist and founder of the Research Foundation for Science, Technology and Ecology. Initiative for the privatisation of water is likely to meet with strict resistance as well. Shiva draws its parallel with patent in seeds, "Everything in the world is being treated as a commodity, and it is not important whether it sustains life." Raising concerns over entry of foreign law firms in India the anti-reformists insist that manpower should instead be developed indigenously to deal with legal issues. Much that Sanjiv Goenka, Vice Chairman, RPG Group may wish a substantial progress in Labour Reforms; the Left is not willing to give up on this one. On its own part, it plans pushing for a review of agreement wherever possible. The mood in the camp is clearly to "fight it out." It is in a better position than ever insists Basu, "With the people's mandate (the Left won 63 seats in the 2004 general election, its highest tally ever) on our side we are better placed both in and out of parliament and also vis a vis the Government". Better placed they may be, but there is no getting away from globalisation, and according to Bhalla it means more accountability and transparency in what the government does. "Globalisation would ensure that people opposed to reforms will lose out on the platform and also on whatever little audience they have now". -Supriya Shrinate
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