Wednesday, December 18, 2013

Raising Interest Rates: Questionable Tool To Fight Inflation

IndusView, Wednesday 18 December 2013 (London): The Reserve Bank of India (RBI) took the market completely by surprise, keeping the repo rate unchanged in the face of overwhelming expectations of an increase citing the tenuous state of the economy. 

Raising interest rates, however, are likely to be a weak tool to combat inflation.

Increasing interest rates to fight inflation that occurs due to rising demand of goods and services could be effective as it makes credit expensive for purchasers. Surging demand is not the case right now given India’s sluggish economy. When used to combat inflation that’s based on rising costs, however, rate increases are ineffective. India’s inflationary pressures on inflation are due to higher world oil and food prices, value added tax and other tax increases as well as delayed effects of a depreciated currency exchange rate.

“When The RBI increases its interest rates, it’s as if it is using a cat to calm the herd,” said Bundeep Singh Rangar, chairman of London-based advisory firm IndusView. “A belief that raising interest rates will rein in inflation that’s propelled by cost factors is dangerous and ineffective. The only effect will be to suppress growth, something India’s economy can ill afford.”

Estimations of the effects of interest rates on inflation, often carried out within central banks, suggest that the effects are small. A typical finding is that a one-percentage-point higher interest rate maintained for one year could reduce inflation by about 0.2 percent.

Costly vegetables, particularly potato and onion, pushed the November wholesale inflation to a 14-month high of 7.52%. The consumer prices rose 9.84% year-on-year in September, the fastest pace in three months.
“A repo rate cut was needed for growth and other tools could have been deployed to fight the menace of inflation,” said Rangar. Given that growth in the economy is at a low point, business confidence is weak and new investments have ebbed, the new RBI governor should have initiated measures to enthuse the market participants, boost investor sentiment and bring confidence back in the economy.”

Other emerging markets like South Korea have tried another approach, with the central bank leaving interest rates unchanged and increasing their flood of foreign capital, which can help absorb inflationary pressure.

South Korea Central Bank data showed short-term foreign borrowing, mostly by banks, jumped by a net $6.72 billion in March, the third monthly increase in a row and the biggest gain since August 2008.

“India needs to attract more inward investment from its 25 million strong overseas diaspora who sent twice as much money into India last year than FDI and FII combined and better collect tax,” added Rangar.

India's economic growth rate picked up in the most recent quarter, according to official figures. The economy expanded at an annual rate of 4.8% in the July-to-September period, up from 4.4% in the previous quarter. Yet, this is the fourth quarter in a row that India's annual growth rate has been below the 5% mark, and the previous quarter's rate of 4.4% was the lowest for four years.
The World Bank slashed India’s economic growth in its April forecast to 4.7% from an earlier projection of 6.1%, a cut of 1.4 percentage points.

Wednesday, November 06, 2013

The Bharti-Walmart Breakup: Where Does FDI in India Go Next?

After a seven-year partnership, Walmart and Indian retail partner Bharti Enterprises last month issued a terse joint message saying they were ending the 50/50 joint venture launched by the two firms in 2006 and had reached an agreement to independently own their business interests in India.
The move wasn’t entirely unexpected. Days before the statement was released, Walmart Asia CEO Scott Price told the media during an Asia-Pacific Economic Cooperation meeting in Bali that “the existing franchise to Bharti is not tenable as the base” for Walmart in India. Both sides were looking at the best way to move forward, he added.
Under the agreement reached by the two firms, Bharti will acquire Walmart’s indirect stake in the Easyday chain of retail stores through acquisition of compulsory convertible debentures of Cedar Support Services, a Bharti group company. In turn, Walmart will acquire Bharti’s stake in the 50/50 Bharti Walmart joint venture, which is a cash-and-carry business-to-business operation under the Best Price marquee. India has allowed 100% foreign direct investment (FDI) in the cash-and-carry segment since 2006. “Given the circumstances, our decision to operate independently will be beneficial to both parties,” said Price.
Even though the split was no big surprise, it didn’t make much sense to many observers. Walmart has been leading the campaign to get government permission for 51% foreign holding in multi-brand retail. In single-brand retail, 100% FDI has been allowed since September 2012. The FDI policy in retail has been extremely controversial and the Manmohan Singh government had to stake its survival on the issue. “The Walmart withdrawal is a victory for small traders,” says Praveen Khandelwal, secretary general of the Confederation of All India Traders, an anti-FDI organization.
But according to Wharton lecturer Edwin Keh, India may actually have little to do with Walmart rethinking its strategy in the country. “I suspect the current moves in India are part of a larger shift by Walmart to put focus back on its domestic business,” says Keh, who was formerly chief operating officer and senior vice president of global procurement for the retail giant. “In the current environment of a recovering U.S. economy, the opportunities may be back at home.”
Even though the divorce was no big surprise, it didn’t make sense to many. Walmart has been leading the campaign for 51% foreign holding in multi-brand retail.

Keh cites other recent Walmart moves to support this theory. “India, China and Mexico have been the countries where Walmart is ‘rebalancing’ its stores,” he notes. However, he sees Walmart’s total business in China as poised for growth with its investment in online grocery retailer Yihaodian. Walmart has a 51% interest in Yihaodian and plans to integrate its logistics operations with that of the latter.
Yet everything is not black and white. The retail giant has recently run into problems with the U.S. authorities over allegations that Walmart de Mexico had bribed its way to market dominance in that country. Even as this investigation was proceeding, further accusations were made about similar transgressions in India, China and Brazil.
Probe in India
Unlike in the U.S., lobbying is illegal in India, and there was significant outcry when Walmart disclosed to the U.S. Senate and the House of Representatives that it had been indulging in India-specific lobbying. Opposition lawmakers in India forced the government to take action, and a retired judge was appointed to probe the issue. While initial indications are that the findings have been inconclusive, a new controversy has arisen. The prime minister’s office has declined to give sought-for details of meetings of the prime minister and his officials with Walmart lobbyists. While this exemption can be claimed under India’s Right to Information Act, it has strengthened the arguments coming from the anti-Walmart contingent.
The Walmart-Bharti separation was orchestrated with unnecessary controversy on another front. In early July, the head of Walmart’s operations in India, Raj Jain, was let go. The announcement was made by Price at a town-hall meeting and came as a big surprise to the employees, who assembled on short notice after a summons via e-mail. Jain had been a trusted general of the company for seven years, and his departure was read as action against those accused in the bribery allegations. The New York Timeshad earlier reported that the joint venture “had suspended several senior executives and delayed the opening of some stores in the country as part of an internal bribery investigation.” Now, many were sure that the kingpin had been identified.
After the break-up, however, Jain was given a vote of confidence from Bharti via a post as advisor to the firm’s retail division. When Rajan Mittal, vice chairman of Bharti Enterprises, made the announcement at yet another town-hall meeting, the employees — who had heard Price in stunned silence — broke out in applause. Jain was unavailable for comment.
Walmart’s discomfiture with its Indian partners is familiar territory for multinationals, according to Keh. “Some countries may prove to be too difficult for multinationals,” he notes. “Multinationals are often held to higher standards and so are often handicapped when competing with national operators.”
Anand Sharma, India’s commerce minister, says that Walmart has already been given plenty of opportunities in the Indian market. “Walmart got enough space,” he notes. “There will be no further steps to woo the company.” With its cash-and-carry venture, Walmart has retained a toehold in India, and observers feel it will make a comeback in multi-brand retail when the regulations are relaxed further. (The company also has the option, of course, of divesting Best Price and getting out of India altogether.)
Finance Minister P. Chidambaram says more relaxations are unlikely. “We have a policy,” he told business channel CNBC-TV18. “A genuine investor must work within that policy. It may not be the ideal policy from [the company's] point of view. But this is the policy that we have today. You have to take it as it is.”
Policy Pains
What is it about the FDI rules that Walmart is finding difficult to accept? The trouble in India is that every policy is accompanied by subsequent clarifications, some of which are difficult to digest. Swedish furniture maker IKEA’s $2 billion proposal to set up single-brand stores in India was stalled because it wanted to operate cafes and restaurants in its stores. According to the government, this would make it multi-brand retail, logic officials first used while rejecting a Marks & Spencer application. IKEA ultimately received the approval move forward; the chain is allowed to sell coffee but only for consumption on store premises. The first IKEA store in India is expected to open in 2017-2018.
Walmart is facing a different obstacle. A contentious clause says that multi-brand foreign retailers must source at least 30% of their products from small industries. This may be possible in textiles and handicrafts, but what about electronics?
The second problematic clause relates to investment. The policy states that 50% of investment must be in back-end infrastructure. The clarifications issued by the Department of Industrial Policy and Promotion state that this must be entirely for green-field assets, meaning Walmart’s investments in India thus far do not count toward meeting that mandate.
With its cash-and-carry venture, Walmart has retained a toehold in India, and observers feel it will make a comeback in multi-brand retail when the regulations are relaxed further.

“It is now clear that foreign players will have to create capacities from scratch. This means that they will need to go back to the drawing board, assess their appetite for investment and rethink their strategies,” Ankur Bisen, vice president for retail at New Delhi-based research and consultancy firm Technopak Advisors, told Knowledge@Wharton in an earlier interview.
Bisen noted that the new set of clarifications has “added more rigidity and disincentives and will result in further delay in investment decisions.” And according to a KPMG study: “These clarifications may pose additional road blocks for global retail players.”
Not Just Walmart
The Walmart-Bharti breakup is not the only recent severing of ties between multinationals and local partners. Fast-food giant McDonald’s, which has a 50/50 joint venture called Connaught Plaza Restaurants, has accused Indian partner Vikram Bakshi of looking after his own business interests in preference to those of the joint venture. On August 30, McDonald’s issued a public notice that deposed Bakshi as managing director. The company would henceforth be run by the board, it said. The affair has ended up with the Company Law Board.
Meanwhile, a year-old 30/70 partnership between Australian coffee chain Di Bella Coffee and Indian entrepreneur Sachin Sabharwal is now embroiled in legal suits and defamation charges. The 26-year-old joint venture between the Munjals and Honda of Japan broke up in 2010, albeit with much less acrimony. Other joint ventures said to be on the rocks include Gillette India (with key shareholder and chairman Saroj Poddar) and German stationery maker Faber-Castell (with partner and managing director Anup Bhaskaran Rana).
Traditionally, JVs break up mainly because of incompatibility issues or big egos. But in India, it may be more the external environment than the internal environment that is causing separations. “In the Bharti-Walmart case, I suspect it is more the FDI policy and possibly the U.S. Foreign Corrupt Practices Act (FCPA) investigation which led to their decision,” says Pradeep Mukherjee, India head and CEO of global HR consultancy firm Mercer.
“U.S. companies entering into a JV are required to have a clear understanding of their duties and responsibilities under the FCPA,” adds S. Raghunath, professor of corporate strategy and policy, and dean of administration at the Indian Institute of Management, Bangalore. “We also know that compliance issues affect U.S. company executives and heighten corruption risk. They are, therefore, extremely concerned about the potential impact of corruption on their business.”
This is the reason why when Raj Jain was shown the door, speculation immediately started that the change was evidence of Walmart trying to “clean up its act” in India. In recent times, several CEOs of multinational subsidiaries in India have been let go. Reebok India’s managing director Subhinder Singh Prem was even arrested for fraud.
“The Bharti-Walmart case is completely different,” says Raveendra Chittoor, professor of strategy at the Hyderabad-based Indian School of Business. Pointing out that the partners in the joint venture came together based on certain assumptions on the regulatory front, Chittoor notes: “For Walmart, their proposed business model does not fit in with the new regulations.”
Traditionally, JVs break up mainly because of incompatibility issues or big egos. But in India, it may be more the external environment.

A joint venture is a partnership between two companies, each bringing its own strengths — “local market knowledge from one and international best practices from the other,” says Bundeep Singh Rangar, chairman of Indusview, a London-based advisory specializing in business opportunities in India for multinational firms. ”Like all relationships, however, one party might fail to fulfill its share of responsibilities, which leads to a breakup.”
Chittoor observes that the breaking up of alliances is very common, both globally and in India. “According to various studies, almost 60% to 70% of joint ventures fail. Failure can be due to many factors. For instance, the objectives of the partnership may not have been thought through or articulated clearly; lack of planning and lack of articulation leading to misunderstandings; different leadership styles; information asymmetry leading to ideological and cultural differences [or] HR issues.”
He makes a distinction between partnerships that spin out of control and those that are designed from the very beginning to break up. Pepsi started in India with the Tatas (Voltas). The moment the laws were changed, the two abandoned the venture. Procter & Gamble-Godrej and Tata-IBM came to an amicable end because the objectives set out at the beginning of the relationship were achieved.
“There is no clear evidence as to how many of the partnerships that break up are by design or because of actual failure,” Chittoor notes. “So even if there are more partnerships breaking up today in India, it is important to see how many of them are a natural progression because the objectives have been met.”
Rangar adds that it would be “unfair” to cast most of the joint ventures being dissolved as acrimonious breakups. “The reason for having a JV is that the overseas company needs handholding as it understands the nuances of doing business in India, and the Indian company needs to learn the best practices in product development and adopt manufacturing technology from the overseas entity,” Rangar says. “When the purpose of the JV is achieved, the partners don’t feel the need to piggyback on each other.”
Raghunath sees a different set of reasons for incompatibility issues between multinationals and Indian partners. “Foreign investors often have deep pockets, a longer-term view of a joint venture’s financial returns and a willingness to reinvest profits and increase capital, while the Indian partner often has a more short-term view and relatively shallow pockets,” Raghunath notes. “The result can be different priorities for investments and a lack of cooperation, both between the JV partners and within the joint management team.”
The bigger issue today for India, which is currently being crippled by a huge current account deficit, is the impact on FDI inflows. “Walmart will be a speck in India’s retail market,” says Chidambaram. “Its absence won’t make any difference to the country.” Rangar is also optimistic. “As long as the broader investment case for an India entry is compelling and overseas companies are patient enough to commit to India for five-to-seven years to see stability in their Indian operations, FDI will keep flowing in,” he predicts. “What’s more, the Indian companies that have deep domestic execution skills will find themselves being courted by overseas companies, not necessarily for a joint venture but on a project-by-project basis.”
But Chittoor sees Walmart as a key player. Since the FDI rules were amended more than a year ago, India has not received a single application for multi-brand retail. “The impact of the Bharti-Walmart breakup on FDI depends on what Walmart plans to do now,” he says. “If it decides to continue in India on its own, it means that it is confident of the potential of the Indian market. That is very positive for FDI. However, if it decides to pull out of India completely, it could have a negative impact.”

Saturday, October 05, 2013

As Rupee Recovery Stalls, Doubts About India Grow

The recovery of India’s rupee, dragged to record lows over the summer as foreign investment retreated from emerging markets, has stagnated.
Trading at about 15 per cent below levels seen through most of the first half of 2013, the currency, analysts say, reflects doubts over the government’s ability to draw down its multiple deficits, and may also signal the end of a short-lived honeymoon for Raghuram Rajan, the new Governor of the Reserve Bank of India.
The setback, analysts say, reflects doubts over the government’s ability to draw down multiple deficits, and may also signal the end of a short-lived honeymoon Raghuram Rajan, the new Governor of the Reserve Bank of India.
About two weeks after taking charge in early September, Mr. Rajan raised lending rates, an audacious move given that India has been coping with its worst economic crisis since 1991.
“The government needed to be more proactive and just showed that fighting inflation is its core priority,” said Bundeep Singh Rangar, chairman of London-based advisory firm IndusView.
“So far, all the actions taken have been to contain a crisis and not to prevent it,” he said.
The rate hike followed other steps Mr. Rajan took immediately after stepping into his post, including the provision of a special RBI window allowing banks to swap dollar deposits into rupees at fixed rates. On the margins of the G20 summit in St. Petersburg, Russia, Indian Prime Minister Manmohan Singh met Japan’s Finance Minister Taro Aso, and the two nations raised to $50-billion (U.S.) from $15-billion a currency swap arrangement – in effect adding a yen cushion to defend the rupee. A few days later, the market regulator enabled foreign investors to buy more Indian bonds.
While that helped to halt a slide in the rupee’s value, the biggest relief came when Fed chief Ben Bernanke surprised global markets on Sept. 18 by delaying tapering of the Fed’s stimulus program. India’s stock market surged 3.4 per cent the following day. But the euphoria hasn’t lasted.
A full Indian recovery needs more than higher rates and a currency backstop. With growing dependence on oil and coal imports, and populist programs that fuel inflation and encourage gold imports, India faces a slew of problems that can only put downward pressure on the rupee.
Retail price inflation is hovering close to double-digits, despite 14 interest rate increases in the past three years. The rupee weakened in the first place because India’s current account deficit (CAD), which measures the gap between its foreign exchange inflows and outflows, remains worryingly high. So does the internal deficit, creating what economists call the “twin deficit” problem. Together, the two deficits make up 9.4 per cent of India’s gross domestic product.
“Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike,” Mr. Rajan said last week, in reference to the U.S. Fed’s $85-billion-a-month bond buying program.
It does not help that Mr. Singh’s Congress party leader, Sonia Gandhi, has led the passage of a controversial food security law that would make state-subsidized wheat, rice and other cereals available to 67 per cent of India’s population of 1.2 billion.
General elections are less than seven months away, leaving little elbow room for the Congress-led coalition to initiate bold reforms or belt-tightening measures.
India’s GDP began slipping after Wall Street descended into turmoil in 2008, dropping to 5-per-cent growth in the year ended last March from between 8 per cent and 10 per cent between 2003 and 2007. It has slipped below 5 per cent in the first two quarters this year.
India’s appetite for diesel fuel, gold and better food have made matters worse.
While global oil prices have risen to six-year highs, India’s state-controlled oil companies sell refined fuel below cost. The fuel subsidy in 2013-14 is expected to rise by 75 per cent to roughly $10-billion.
Stoked by rising fuel prices, domestic inflation surged to double-digit levels in the past two years and food items exceeded annual inflation levels of 15 per cent. A state-funded rural jobs program has driven up wages, resulting in a yawning government deficit.
Mr. Singh’s government, keen to maintain growth, has provided income tax concessions. That has prompted increasingly affluent Indians to buy gold, which exacerbates its current account deficit.
The problems are compounded by coalition politics. Socialist-minded regional parties supporting Mr. Singh’s Congress oppose any rise in state-controlled fuel prices.
A move to allow foreign direct investment through retail, conceived to attract firms such as Wal-Mart Stores Inc., also flagged, owing to political opposition.
India has begun a process to attract remittances from expatriates, who sent $69-billion home in 2012. The central bank governor said India will not need to dip into its reserves to defend the rupee from falling further. It also has the option of issuing sovereign bonds.
For the moment, the government is urging state-owned companies to raise loans abroad to take some pressure off the rupee. Finance Ministry officials said recently that they have asked state-controlled petroleum companies to raise funds for expansion overseas.
With real assets backing them, these companies – including exploration firm Oil and Natural Gas Corp. Ltd. and refiner Indian Oil Corp. – typically can bring in foreign exchange on better terms than the government would get if it were to issue sovereign bonds. But the initiative has yet to gain traction, and there isn’t much the central bank governor can do on his own to push the program along.
The real challenge is for the federal government to open up sectors still under state control, such as housing, to attract more foreign investment.

NanoStruck Technologies Inc. Begins Trading on OTCQX®

NEW YORKOct. 3, 2013 /PRNewswire/ -- OTC Markets Group Inc. (OTCQX: OTCM), operator of Open, Transparent and Connected financial marketplaces, today announced that NanoStruck Technologies Inc. (OTCQX: NSKTF; CNSX: NSK), a water remediation company, has been approved to trade on OTCQX®, the best marketplace with qualified companies.
NanoStruck began trading today on OTCQX International, a segment of the OTCQX marketplace reserved for high-quality non-U.S. companies that are listed on a qualified international exchange, undergo management reviews and provide their home country disclosure to U.S. investors.  U.S. investors can find current financial disclosures and Real-Time Level 2 quotes for the company on
"We are pleased to welcome NanoStruck to OTCQX," said R. Cromwell Coulson, President and CEO of OTC Markets Group.  "OTCQX provides qualifying companies like NanoStruck the ability to distinguish themselves in the U.S. market and increase their visibility with traders, investors, analysts and the media through high-quality disclosure, transparent trading and ease of access to company information.  We look forward to supporting the management team at NanoStruck as they continue to grow the company and provide a robust public market for their shares."
"Qualifying for OTCQX is an important milestone for NanoStruck and demonstrates our commitment to providing our U.S. investors convenient access to the same timely news and information enjoyed by investors in our home market," said Bundeep Singh Rangar, interim CEO and Chairman of the Board of NanoStruck.
Burns, Figa and Will, P.C. will serve as NanoStruck's Principal American Liaison ("PAL") on OTCQX, responsible for providing professional guidance on OTCQX requirements and U.S. securities laws.
NanoStruck is a water remediation company with a suite of technologies and proprietary nano-biotechnology solutions that provides environmentally safe solutions for water purification, restoration and contamination issues.  The company uses the EPA guidelines as a benchmark for what constitutes safe agricultural or drinkable water, and tailors these guidelines to those standards that are acceptable in the jurisdiction in which the technology is used.  Additionally, this technology can be used to recover heavy and precious metals from mine tailings.
NanoStruck trades in the U.S. on OTCQX under the symbol "NSKTF."
About OTC Markets Group Inc.  
OTC Markets Group Inc. (OTCQX: OTCM) operates Open, Transparent and Connected financial marketplaces for 10,000 U.S. and global securities. Through our OTC Link® ATS, we directly link a diverse network of broker-dealers that provide liquidity and execution services for a wide spectrum of securities. We organize these securities into marketplaces to better inform investors of opportunities and risks – OTCQX®, The Best Marketplace with Qualified Companies; OTCQB®, The Venture Stage Marketplace with U.S. Reporting Companies; and OTC Pink®, The Open Marketplace with Variable Reporting Companies. Our data-driven platform enables investors to easily trade through the broker of their choice at the best possible price and empowers a broad range of companies to improve the quality and availability of information for their investors. To learn more about how we create better informed and more efficient financial marketplaces, visit