The first three months of the new Indian Government

By Sugato Hazra

Economy:

A major jolt to the Indian hope of a fast break out from the Global economic crisis came from the truant monsoon. India’s Prime Minister Manmohan Singh admitted that the country was facing a "difficult situation" following delayed and deficient rainfall. While the government claims to have adequate foodgrains, there is the problem of hoarding and profiteering. "Agricultural operations have been adversely affected in several parts of the country causing distress to farmers. A deficit of more than 6 million hectares has been reported in paddy, which is the worst affected crop," said the Prime Minister while addressing the Conference of Chief Secretaries on the monsoon situation in Delhi. Cautioning that the reduced production of Kharif crop in the current year may have an inflationary impact on prices of food items in the coming months, Singh said the Centre and states will have to work together and activate the public distribution system (PDS)

The current rate of CPI (consumer price index) is at 8-9-10% since food is a big part of the CPI. It is likely to take WPI higher later in the year. The rest of the other commodities, the non-food commodities like metals, oil are influenced less by what happens in India than in the world per se. The problem is if food inflation persists, and the signs are there, manufacturing sector will hardly have any pricing power. When manufacturing has no pricing power, corporates will think many times before investing and that will bring the recovery down.

Meanwhile RBI left rates unchanged while announcing the credit policy. For RBI it would have been a knee jerk reaction had it tightened interest rates in response only to food inflation at a time when manufacturing recovery is still weak. However many opine that if RBI keeps liquidity high, what happens is that food prices that were already going higher because of the demand supply constraints are going to go higher because liquidity is ample so the money is basically going into food. RBI is on the contrary worried that withdrawing liquidity at a time when manufacturing is not likely to recover and at a time that manufacturing has no pricing power, will hurt the economy even more. That’s why in the next six to eight months it is unlikely that RBI will tighten even if food prices go higher.

Sectoral Concerns

Civil Aviation

Civil Aviation sector in India is in a bad shape. While the state-owned Air India is grasping for capital infusion, the private companies, too, have been seeking the government bailout. The Prime Minister has been "very sympathetic" to the problems faced in general by the sector – the sector has been protesting the high rates of sales tax imposed by various state governments on aviation turbine fuel. Airlines have also been seeking lowering of airport charges. Air India (AI) is betting on a drastic makeover, and a possible stake sale, to pull itself back from the brink of bankruptcy.

AI is estimated to have suffered a loss of Rs 7,200 crore in the financial year ending March 31, 2009. For undertaking its various restructuring plans the company would require a huge inflow of capital. NACIL ( the holding company controlling AI and Indian Airlines) will have to change the way it does its business. A major step in this direction would be to look at costs on per seat basis. The airline will now monitor aspects such as revenues per seat/ km as per international standards. The carrier will make sure that of the 38,000 seats available each day, it has an occupancy rate of over 80 per cent. For this the company through its Air India Express service will be looking at sectors where private carriers have negligible presence.

Airport Authority of India to be Converted into a Public Company

The Civil Aviation Ministry of India plans to convert the Airport Authority of Indian (AAI) into a public company as a way of raising funds.The ministry will amend the laws contained in Airport Authority of India Act, the principal act governing various airports in India. By converting the AAI into a public company, funding will become easier and the AAI will be able to raise money from the primary and subsequently from secondary market. The amendment is expected to be placed before the parliament by 2010.

At present, the AAI is modernizing major airports in Kolkata and Chennai as well as 35 regional airports within the country and has huge property holdings across the country. The authority is also planning to spend US$2.6 billion on airport modernization over the next three years. The financing for these developments will be done through internal resources and borrowing by the AAI.

Out of the 125 airports managed by the AAI only 86 are operational. Only 15 airports in India turned a profit in 2007-08. By converting the AAI into a public company the government plans to bring a major up-gradation through public money.

Banking Sector

The government has sought a $3.2 billion loan from the World Bank to infuse capital into public sector banks, the Lok Sabha was informed on August 7, 2009. Minister of State for Finance Namo Narain Meena responded in the affirmative, in a written reply to the Lok Sabha to a query on whether loans from the multilateral lending agency contain a proposed $3.2-billion for recapitalising state-run banks.

"To enable the PSBs to meet credit requirements of the economy while maintaining a healthy and comfortable level of regulatory capital to risk-weighted assets ratio, a proposal has been sent to the World Bank," he said. However, the government contended, "The assessment of the Indian financial system during 2007-08 done by the Reserve Bank of India shows that the banking sector in India continues to be healthy, sound and resilient."

War over Natural Gas

The government suffered an embarrassment of sorts in the continued family feud between the two Ambani siblings Mukesh and Anil. With Anil vitriolic in his attack on the bias of Murli Deora, an old ally of his late father Dhirubhai and the current P&NG Minister and political parties of different hues – the Samajwadi Party of Mulayam Singh Jadav and the Left parties – joining the issue, the government found itself on the defensive, a position it would have loved to avoid. In fact the Oil Ministry had to make public that it has informed Prime Minister Manmohan Singh it was not favouring Mukesh Ambani in his ongoing tussle with younger brother Anil and it had moved Supreme Court only to protect its rights on natural gas. The Oil Ministry has filed a special leave petition in the Supreme Court challenging the High Court ruling of June 15 that asked RIL to supply gas to Anil group firm RNRL at a committed price of USD 2.34 per mmBtu and work out a suitable agreement for it.

The fissures within the government - more so the allegiance of politicians to big money - created the avoidable predicament for the government. This led the Editor of India Today to comment : “For me whenever the Ambani war hots up it reveals the ugly underbelly of Indian politics and business. Last time it was the hundreds of RIL investment companies with all kinds of dubious transactions. This time, it is how everything looks kosher but somehow it gets fixed to give favours to a preferred party. This is not to say that any of the players in this dispute can apply for sainthood but the fact that our system of government regulation and tendering processes lacks transparency and true accountability. India ranks below even Swaziland on the World Bank's index on ease of doing business. If we are to develop our desperately needed infrastructure, this has to change.”

Reality of Real Estate

That India’s once booming realty sector has still been reeling under consumer apathy is no secret. Even big realty firms have of late refrained from announcing ambitious plans. They all are now trying to harp on affordability as a mantra. Meanwhile many of these firms have been wriggling out of unrelated businesses – Unitech managed to earn some decent amount from its telecom licence. DLF, India’s largest, did not like to be left behind. News leaked that it would sell its holding in the Insurance business DLF Primerica.

Unfortunately a statement from IRDA, the insurance regulator, threw cold blanket on the story built up. Its recent corporate governance guidelines state: “IRDA prescribes a minimum lock-in period of five years from the date of commencement of an insurance business for the promoters and no transfer of shares of the promoters would be permitted within this period.” The IRDA Chairman J Harinarayan confirmed that all companies that have commenced operation in the last two-three years have the lock-in clause in their agreement but companies that were formed prior to that were not bound by this clause. For instance, the promoters of DLF Pramerica, which began its operations in 2008, cannot sell their stake until the lock-in period is over.

The regulator also said that no company has approached for any change in ownership yet. Companies that began operations since 2006 include Bharti Axa, Future Generali, IDBI Fortis, Canara HSBC, OBC, Aegon Religare, Star Union Daiichi and DLF Pramerica

India to File WTO Complaint on European Union: Pharmaceutical

The Wall Street Journal reported that India is planning to file a World Trade Organization complaint that accuses the European Union of allowing multinational pharmaceutical companies to use the bloc’s strict patent laws to detain Indian generic drugs in transit to developing countries. Since last year, customs officials in the Netherlands and Germany have seized Indian medicines on grounds that the broke EU patent laws. Indian pharmaceutical companies have been forced to pay more to move shipments to transit hubs outside the EU as well as hire legal help to allow the drugs shipped to their destination.

At the request of companies including Sanofi-Aventis SA, Novartis AG and Eli Lilly & Co., the drugs were then detained for periods that extended for as long as eight months, according to letters sent by the companies to customs officials.“We see this as an attack on the Indian generics industry,” said Rajeev Kher, Joint Secretary of Commerce in India.

The pharmaceutical industry is one of India’s top export earners. According to Global Trade Information Services, Indian pharmaceutical exports, consisting mostly of generics, reached US$4.9 billion last year. However, pharmaceutical exports to the United States suffered from depressed demand dropping close to 40 percent in the five months between October last year and the end of February.

EU officials maintain that their national customs agencies have the right to detain goods deemed to be violating their intellectual property laws. The EU is “complying with its WTO obligations,” spokesman Michael Jennings said in a statement.

An WTO investigation on the complaint could take nine months to investigate. Should the WTO rule in favor of India, it may be given the right to impose retaliatory tariffs on import of goods from the EU.

India to Enact to Foreign Investment Law

The Indian government has proposed to enact a new law on foreign direct investment in India, removing the distinctions between the categories of overseas funds that flow into the country.

The Foreign Direct Investment Act which will mainly concentrate on removing the distinction between various types of overseas fund flows like portfolio investment, venture capital, private equity and direct investment. The new law aims to provide a clear guideline on convertibility and avert discrimination against investments that take place through debt or quasi-debt instruments.

The law’s framers are also concentrating on bringing major changes to the Foreign Exchange Management Act. The FEMA provides laws, rules and regulations for inbound and outbound foreign investment.

Meanwhile the government explained to the members of the lower house the three press notes issued on the issue. Government had issued Press Notes 2, 3 and 4 of 2009 in February, 2009, on the subjects of: (i) Guidelines for calculation of total foreign investment i.e. direct and indirect foreign investment in Indian companies (ii) Guidelines on transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities and (iii) clarificatory guidelines for downstream investment by Indian Companies (respectively).

Guidelines contained in Press Note 2 of 2009 intended to simplify, streamline and rationalize the methodology of calculation of indirect foreign investment across sectors leading to investor friendly, credible and predictable regulations and to facilitate greater foreign capital inflows and send a positive signal in the present difficult economic scenario. These are not sector specific and are applicable for determining the total foreign investment in all sectors, except where such policy/ methodology is governed specifically under any statutes or rules there under, such as the Insurance sector.

The guidelines contained in Press Note 3 of 2009 would ensure that, in sectors with caps, Government approval/FIPB approval would be required in all cases where an Indian company is being established with foreign investment and is owned or controlled by a non-resident entity; or the ownership or control of an existing Indian company, currently owned or controlled by resident Indian citizens and Indian companies, which are owned or controlled by resident Indian citizens, will be/is being transferred/passed on to a non-resident entity as a consequence of transfer of shares to non-resident entities through amalgamation, merger, acquisition etc.

Guidelines contained in Press Note 4 of 2009 would result in clarity on the need for Government/FIPB approval for Indian companies that are making downstream investments. These guidelines apply also to the Banking sector.

Retail Sector Not Open to Reforms

India has indicated no plans to reform its retail industry in efforts to safeguard the second largest source of jobs in the country. Foreign investors feel that India’s retail market remains untapped since the same is closed to them. Their heartburn is understandable since AT Kearney’s Global Retail Development Index last year ranked it as the second most attractive emerging market.

Minister of State for Commerce Jyotiraditya Scindia informed the Lok Sabha that the government recognizes the need to ensure that small retailers are not adversely affected by the growing organized retail and that there is no adverse effect on employment.

India Looks to Enact Direct Selling Legislation

India is set to strengthen its direct selling legislation in order to further support and develop the industry. The Indian Direct Selling Association (IDSA) has urged the government to formulate a regulatory framework so that the true potential of the sector can be realized. “Growing at 13 per cent annually, a definition of direct selling as a legitimate distribution and marketing model will ensure transparency and can accelerate the growth rate manifold,” said IDSA Chairman Fredrik Widell.

Mr. Widell pointed out that the direct selling business is likely to double its size to half a billion dollars in the next three years considering India’s huge population base. “The growing concern of increasing number of fraudulent schemes and fly-by-night companies makes the demand for a proper legislation all the more pressing. This will not only protect the interest of legitimate direct selling companies but also that of the consumers at large,” he said. At present, the Indian direct selling market from the foreign investment perspective is dominated by Amway, Tupperware and Avon

India Will Not Accept Binding Greenhouse Gas Emission Cuts

With less than five months until the anticipated Climate Conference in Copenhagen scheduled for December, India announced its steadfast position that it cannot accept any “legally binding” greenhouse gas emission reductions but assured that its carbon footprint would never exceed that of developed nations. In a joint press conference with U.S. Secretary of State Hillary Clinton, Environment Minister Jairam Ramesh said that New Delhi was “simply not in a position” to accept any legally binding emission reductions. He asserted, “In 2020, it’s conceivable that we might look at a limited target. But in 2009, no way.”

Ramesh stressed India has been following all its environmental obligations. Its practices are firmly anchored in the UN Framework Convention on Climate Change and the Bali Action Plan. Both India and China share in the belief that mandatory cuts are unfair and could prevent future economic growth. Noting that the developed Western world bears significant responsibility in global warming, India and China feel it is unfair for pressure to lie solely on their shoulders to meet emission targets.

To counter this sentiment, Secretary Clinton has offered technological help to India to reach its targets and assured Indian officials that the country’s economic growth would not be risked by low carbon emissions. It should be noted that India’s per capita emissions are relatively low in contrast to developed nations. The average Indian creates one metric ton of carbon dioxide for every 20 metric tons the average American creates. It is India’s burgeoning over one billion population, however, that places it among the largest polluters in the world.

The new UN climate treaty to come out of the Copenhagen talks may come to a deadlock unless developed and developing countries can decide who takes the burden of the emissions reductions while creating an agreement that benefits all.

India to Host Doha Round in September

New Delhi is set to host the Doha Development Round from September 3 to 4 that will gather ministers from the G20 countries. Since 2001, the trade-negotiation round of the World Trade Organization (WTO) has aimed to increase and liberalize global trade and more importantly allow developing countries to export more by negotiating to lower trade barriers.

Regular global meetings have so far been hampered by unresolved issues between developing and rich countries when it came to the topic of agricultural and industrial products. India has been fiercely guarding issues that could affect the food and livelihood of its marginalized farmers but is hopeful that the September meeting will lead to a final deal since it was already close to formalizing one last year.

India, ASEAN to Settle Free Trade Agreement

India’s delayed FTA with ASEAN is scheduled for implementation beginning January 1, 2010. If it is finally implemented it will cut tariffs by up to 4 percent on more than 4,000 products these include electronic goods, chemicals, capital goods and textiles in the next six years. During trade negotiations, India asked for annual tariff cuts instead of twice a year. The country also specified that some agricultural products will be exempt from tariff cuts while duties on products considered sensitive industries like garments and automobiles will be cut by 5 percent.

India-ASEAN trade amounted to US$ 17.02 billion during the period 2007-2008, a 13 percent increase from the previous year. The group is one of India’s biggest trading partners. The ASEAN includes the countries Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Lao PDR, Myanmar and Cambodia. The group accounts to a total gross domestic product amounting to US$1.1 billion and trade of around US$1.4 billion.

However there is opposition to the FTA. Agricultural experts, fishermen’s representatives, trade union leaders and Kerala’s Marxist Chief Minister V.S. Achuthanandan have been at pains to convince the pro-reform central government of Prime Minister Manmohan Singh that the deal should be postponed or scuttled.

India is a dialogue partner at ASEAN - which comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. ASEAN already has FTAs with three other dialogue partners - China, Japan and South Korea.

ICAC Proposes Major Audit Changes

India’s audit regulator, the ICAC, has recommended new changes to audit procedures in India in the wake of the recent Satyam scandal. These include the appointment of joint auditors for large businesses, and the rotation of auditing partners assigned to specific clients every five years.

The changes are recommended due to the current state of India’s accounting and audit professions which have until recently restricted the size of audit practices and led to a gap between the size of corporations subjected to audit and the resources of the firms authorized to audit them. The Satyam scandal led to the arrest of PriceWaterhouseCoopers auditors and also a review of the restrictions placed on the development of the industry.

In short, a multi-million dollar fraud occurred without the auditor having sufficient resources or personnel in place to deal with the complex nature of the case. India’s audit industry is currently in the initial phases of reform and is only opening up to foreign practitioners, however, these new recommendations are intended to help fill the regulatory gap until such firms can develop enough resources to cope.

In India, public sector companies and banks have joint audits. The concept of a joint audit - where more than one firm audits the financials - is not popular globally and of the G20 countries is only practiced by France.

Political Issues

The smooth passage of the Union Budget notwithstanding due to tumbling out of some skeletons from the government cupboard lost had been much of the expectations which followed the electoral verdict 2009.

The grain export scam which exposed the nexus of the state-run trading houses like STC, MMTC with some private exporters pointed finger directly to few ministers and ministries. Also came in the open apparent favouritism in import of coal. Much of the hope for transparency in the governance eroded as a consequence.

The Prime Minister faltered on two counts, both on issues relating to diplomacy. First he seemed to be siding with a G-8 declaration from Italy on global warming and the call for reduction of CO2 emissions from developing economies like India and China. Thankfully the faux pas did not attract much attention both from the politicians and the media. However Singh was not so lucky with his joint declaration with Pakistan.

Any announcement on terrorism and with Pakistan receives close scrutiny from politicians, intellectuals and media. Singh was believed to be undermining India’s stated position on cross-border terrorism and received flak from the entire opposition in the nation’s parliament. It was apparent that even within the ruling party not many sided with the Prime Minister. The two incidences, the second in particular, badly exposed the fact that the Prime Minister is certainly not in command. However given the well laid down political system within Congress and UPA this should not worry investors unduly.

The weakness of the cabinet over the political reality of a coalition era was the Land Bill. Despite cabinet decision to introduce in the current session of the parliament the Land Acquisition Bill could not be placed due to opposition from Mamata Banerji, the second largest party within the ruling UPA. It is unlikely that the bill can ever be placed in its present form. Should investors get perturbed? Not if they believe that democracy is a process of debate and finally whatever is for greater good will win. Investors cannot succeed if the public at large are not convinced of the greater good, as Ratan Tata had learnt at Singur. Mamata remains a force to reckon with, a replacement of sorts of the ever opposing Left in the 14^th Lok Sabha.

The smooth functioning of the Parliament indicates the maturity of the political parties. Healthy debates on many issues illustrate the shape of things to come in the next five years. The 15^th Lok Sabha and the second term of the Manmohan Singh government is certain to create a balance of sorts between the need for investment and growth and the urgency of greater good, populism to some. One likes it or not, any policy decision unless placed as serving the need of the majority might not see the light of the day in the 15^th Lok Sabha.

BUDGET SESSION OF PARLIAMENT 2009

The Budget Session, 2009 of Parliament which commenced on July 02, 2009 concluded on August 8. The Session yielded a total of 26 sittings spread over 37 days.

During the Budget Session 17 Bills (16 in Lok Sabha and 1 in Rajya Sabha) were introduced. Lok Sabha passed 8 Bills and Rajya Sabha passed/returned 8 Bills. Total number of Bills passed/returned by both Houses of Parliament during the Session is 8. A list of Bills introduced/passed/returned is at the end.

The Session was mainly devoted to transaction of Financial Business relating to Railways, General Budgets and Budget relating to the State of Jharkhand for 2009-10. The Railway Budget was presented on July 03, 2009 and the General Budget on July 06, 2009. General discussions on the Railways and General Budgets were held in both the Houses. The Lok Sabha also voted the Demands for Excess Grants for 2006-07 relating to General Budget. Appropriation Bill relating to this Demand was introduced, considered and passed by Lok Sabha and subsequently returned by Rajya Sabha. General discussion on Jharkhand Budget was also held in the Lok Sabha and Rajya Sabha. Lok Sabha also discussed and voted the Demands for Grants relating to Jharkhand Budget for 2009-10 and related Appropriation Bill was introduced, considered and passed and subsequently returned by Rajya Sabha.

The Rajya Sabha discussed the working of Ministries of (i) Health & Family Welfare; (ii) Social Justice & Empowerment; (iii) Communications & Information Technology; (iv) Road Transport & Highways; (v) External Affairs; and (vi) Environment & Forests. The two Houses also considered and passed/returned the Finance (No. 2) Bill, 2009.

In Lok Sabha, four Short Duration Discussions under Rule 193 on: (i) Swine flu; (ii) Drought and floods; (iii) Issues arising out of Prime Minister’s recent visit to foreign countries; and (iv) Rise in prices of essential commodities were held. Besides, three Calling Attentions on: (i) Pollution in rivers and lakes; (ii) Export of non-basmati rice; and (iii) Large-scale loss of jobs due to retrenchment and closure of industries, were also discussed in Lok Sabha.

In Rajya Sabha, three Short Duration Discussions under Rule 176, were held on: (i) Measures to prevent ragging in the institutions of higher education; (ii) Increasing obscenity and vulgarity in television programmes; and (iii) Rise in prices of essential commodities. Besides, nine Calling Attentions on: (i) Swine flu; (ii) Depletion of the population of tigers; (iii) Disturbances of peace in North Cachar Hills district of Assam; (iv) Deteriorating financial condition of Air India; (v) Hike in price of petrol and diesel; (vi) Position of Monsoon and deficient rainfall in the country; (vii) Increasing incidents of so called honour killings and honour related crimes in the country; (viii) Large-scale loss of jobs due to retrenchment and closure of industries; and (ix) Availability of natural gas for power generation and other national priorities at affordable price throughout the country, were also discussed in Rajya Sabha.

Legislative business - 217^th session of Rajya Sabha (budget session, transacted during 2nd session of fifteenth Lok Sabha and 2009)

I – BILLS INTRODUCED IN LOK SABHA

The Finance (No.2) Bill, 2009

The Appropriation (Railways) No.3 Bill, 2009

The Appropriation (No.2) Bill, 2009

The Jharkhand Appropriation (No.2) Bill, 2009

The Appropriation (No. 3) Bill, 2009

The Rubber (Amendment) Bill, 2009

The Life Insurance Corporation (Amendment) Bill, 2009

The National Green Tribunal Bill, 2009

The Companies Bill, 2009

The Indian Trusts (Amendment) Bill, 2009

The Securities and Exchange Board of India (Amendment) Bill, 2009

The Metro Railways (Amendment) Bill, 2009

The Workmen’s Compensation (Amendment) Bill, 2009

The Employees’ State Insurance (Amendment) Bill, 2009

The National Commission for Minority Educational Institutions (Amendment) Bill, 2009

The Land Port Authority of India Bill, 2009

II - BILLS INTRODUCED IN RAJYA SABHA

The Constitution (One Hundred and Ninth Amendment) Bill, 2009

III – BILLS PASSED BY LOK SABHA

The Appropriation (Railways) No.3 Bill, 2009

The Appropriation (No.2) Bill, 2009

The Jharkhand Appropriation (No.2) Bill, 2009

The Appropriation (No.3) Bill, 2009

The Finance (No.2) Bill, 2009

The Constitution (One Hundred and Ninth Amendment) Bill, 2009

The Right of Children to Free and Compulsory Education Bill, 2009

The Metro Railways (Amendment) Bill, 2009

IV - BILLS PASSED/RETURNED BY RAJYA SABHA

The Appropriation (Railways) No.3 Bill, 2009

The Appropriation (No.2) Bill, 2009

The Jharkhand Appropriation (No. 2) Bill, 2009

The Right of Children to Free and Compulsory Education Bill, 2008

The Appropriation (No.3) Bill, 2009

The Finance (No.2) Bill, 2009

The Constitution (One Hundred and Ninth Amendment) Bill, 2009

The Metro Railways (Amendment) Bill, 2009

V - BILLS PASSED/RETURNED BY BOTH HOUSES OF PARLIAMENT

The Appropriation (Railways) No.3 Bill, 2009

The Appropriation (No.2) Bill, 2009

The Jharkhand Appropriation (No.2) Bill, 2009

The Appropriation (No.3) Bill, 2009

The Finance (No.2) Bill, 2009

The Constitution (One Hundred and Ninth Amendment) Bill, 2009

The Right of Children to Free and Compulsory Education Bill, 2009

The Metro Railways (Amendment) Bill, 2009