Posted by: John Elliott | October 16, 2007

Rich valuations for players in Mumbai’s bull market

India’s stock market is “in the middle of a mania”, says Manish Chokhani, executive director of Enam Securities, one of Mumbai’s leading brokerages. “It’s stupid days in India – a bubble zone,” he told me this morning, commenting on the 30-stock Bombay Stock Exchange’s Sensex index rush past 19,000 yesterday. That was a rise of 1,000 in five trading days, the fastest ever, and over 3,000 points higher than a month ago – all record highs driven by massive inflows of foreign money totaling some $7 billion over the past month.

I had rung Chokhani to ask whether it was despite (or because of) such inflated bull market prices that Nomura, the Japanese investment bank, was reported to have withdrawn from talks to buy a substantial chunk of his firm. Nomura declined to comment on the reports, which are well founded according to Mumbai sources, and Chokhani would neither confirm nor deny that Nomura had made a bid and had now withdrawn.

Chokhani also would not comment on rumors that Enam’s price had been too high for Nomura, but he did say that the firm was worth well in excess of $1 billion, judging by a recent $700 million IPO valuation on Motilal Oswal, a smaller Mumbai securities firm.

There has been a big foreign rush to grab a slice of the action in Mumbai as prices have soared. Big names like Merrill Lynch (MER), Morgan Stanley (MS) and Goldman Sachs (GS) have had local relationships for many years, though these have changed with time. In February, Morgan Stanley bought out the 50% stake held by its partner, JM Financial, in a brokerage joint venture. Standard Chartered, Lehman Brothers (LEH), BNP Paribas, and various private equity firms including a Citi (C) venture capital fund, have been involved in smaller deals.

So the market was watching Nomura’s courtship of Enam to see what would happen to such a prominent firm – it was involved in mobilizing over $24 billion institutional and retail funds for share issues in 2006-07, leading the market with a 25%-30% share. Now that this deal appears to be off, the next marker is an imminent IPO by Edelweiss, another leading brokerage and investment bank, which is expected to be valued at well over $1 billion.

With such figures around, it seems that Mumbai’s leading brokers find it difficult to fade away. Hemendra Kothari, the doyen, still plays a leading role as chairman in DSP Merrill Lynch, a relationship he started building 20 years ago. Nimesh Kampani, chairman of JM Financial, one of Mumbai’s top two firms, is rebuilding his business following the Morgan Stanley buyout.

As market activity escalates, people such as Vallabh Bhanshali, the chairman of Enam, would probably rather retain control than sell their souls and their future to a foreign bidder – especially when rocketing valuations can make today’s prices look silly tomorrow. Enam has in the past been pursed by Rothschild, J.P.Morgan, and Lehman as well as Nomura. “We are very wealthy people and have no reason to sell,” said Chokhani, adding that Enam would rather broaden the base of its ownership to include staff than sell to an outsider.

Foreign money has no doubt been attracted into the market in recent weeks by the prospect of India’s proposed nuclear deal with America, which would have stimulated business between the two countries. But it did not seem to be too worried that Manmohan Singh, the Indian prime minister, confirmed in a phone call to George W.Bush on Monday that the deal would not be going ahead in the foreseeable future because of a lack of political support.

Lehman offset that news today by saying that India’s economy has the potential to grow at 10% or more over the coming decade, with the equity market outperforming other developed and emerging market indices over the next five years. That is good news for the Mumbai players.

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Posted by: John Elliott | October 12, 2007

India cools election fever – and nuclear ardor

India’s political crisis over its proposed nuclear deal with America appears to have gone away, at least for the time being – and with it any prospect of the deal being put into action in the foreseeable future.

This unexpected turn of events emerged this morning at a conference in Delhi where Manmohan Singh, the prime minister and primary promoter of the deal, said that “we are not a one issue government.”

He said it was an ‘honorable deal” that had widespread benefits, then added: “But we are in the realm of politics and in our coalition there are divergent points of view” – and there were economic and social policies that the government wanted to pursue before holding an election.

“We are not in favor of an early election,” Sonia Gandhi, leader of Singh’s Congress Party and of the coalition, said later at the same conference that was organized by the Hindustan Times.

“We are going to do all we can to go on to 2009,” she added – 2009 is when the next election is due. The Congress Party was “committed to the people to work for a full term” so there was a need to “work towards a consensus with the Left,” which had been opposing the deal. The government had to “take notice of their views.”

I was at the conference and the delegates – businessmen, journalists, and diplomats – were amazed, not least America’s diplomats who didn’t seem to have been warned in advance.

It remains to be seen how Washington formally responds (after the weekend), but the administration will be far from happy that a deal struck by the two governments – after being promoted by President George W. Bush and Secretary of State Condoleezza Rice – is being unceremoniously shelved. American companies will also be upset that the prospect of rich nuclear and other contracts are fading into the distance.

Basically though, Singh and Gandhi have taken a sensible decision. The nuclear deal was going to split their coalition because of staunch opposition from Leftist parties and was likely to cause a general election – and for what?

On the table was a deal that could boost nuclear power generation years ahead and might ease India’s access to sensitive technologies in the future – but which, however, might not be liked much by the next American administration. From India’s point of view, it can wait – and the government can stay in power

It is not yet clear how all this will be implemented as policy. Possibly, the government will just go slow on talks with the International Atomic Energy Agency. I said three days ago in my last post,  that it was not clear how long India would be prepared to go slow. Now it looks as if it could be indefinitely – maybe till there are new governments in both America and India.

So, unless there is another change of tack by the Indian government, I was wrong three days ago to forecast a general election early next year. But politics move fast – and chaotically in coalitions – so watch this space.

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Posted by: John Elliott | October 9, 2007

India’s nuclear-induced political brinkmanship

India’s politicians, media, and political analysts are in a frenzy. One day the country seems to be on the brink of an imminent general election, and the next day it is not; at least not yet and maybe not till well into next year.

There are frequent bust-ups – accidental, simulated or real – between the Congress-led government and the block of Left parties that support it in parliament. It’s real election fever stuff – maybe though not so feverish as in Britain last week before Gordon Brown chickened out of holding a general election. And, unlike Britain, the decision on having an election here is not down to one man but is dependent on the political swings of people who are fairly new to such brinkmanship politics – Manmohan Singh, the prime minister, Sonia Gandhi, the leader of the coalition, and the Left parties.

The subject that’s causing all the fuss is the proposed nuclear deal which would give India access to nuclear fuel and technology for its electric power program from America and elsewhere, and build a strong diplomatic as well as economic bond between the two countries. There would also be other benefits for Indian industry, which would gain international access to sensitive technologies as well as potential orders in the space and defense fields – all of which have been progressively denied to India since its nuclear tests in 1974 and 1998.

These are substantial benefits and they have led to the deal being generally supported by a considerable majority of politicians, bureaucrats, scientists and opinion formers in India. But the deal is firmly opposed by the Left which (not surprisingly) distrusts and opposes such a close and dependent relationship with America. The Left also fears (justifiably) that America could and would cut off the nuclear supplies and other advantages if a future government in Washington opposed something India did, despite safeguards negotiated as part of the proposed deal. Washington says that such a cut-off is unlikely because there would be a large number of powerful US companies such as Boeing, GE, Raytheon, and Lockheed Martin that would lobby against losing business – but that does not satisfy the critics. There are also questions (though, sadly, little real debate) about whether potentially expensive nuclear power is the right way to tackle the country’s power shortages, and about whether the main beneficiaries would perhaps be American contractors.

Two determined men are facing each other over the deal – and thus the future of the government. One is the prime minister who, supported by Gandhi, sees the deal as significant historically as the seminal economic reforms that he introduced as finance minister in 1991. He has even talked about resigning if the deal does not to go through. The other is Prakash Karat, the hard-line leader of the CPI-M, India’s biggest communist party that leads the block of 60 Left party MPs. Karat seems determined to withdraw support from the coalition if the deal proceeds, even though he knows that such an action would remove the government’s parliamentary majority and could lead to a general election before the due date in 2009.

The first option that I outlined in a post on August 23, 2007 – “India’s government risks being nuked” – is therefore now in play. The government is buying time with the Left by going slow on operationalising the deal through talks with international nuclear authorities. The current on-off crisis stems from uncertainty about how slow the government is prepared to go and how rigidly the Left will eventually block the deal. Specifically, in line with America’s wishes, the government wants to start talks soon on nuclear safeguards with the International Atomic Energy Authority (IAEA), the UN’s nuclear watchdog, and the Left says it will withdraw parliamentary support if and when that happens. (Mohamed El Baradei, the head of the IAEA, is in India this week on a long-scheduled visit that includes a speech on Friday at a conference dealing with India’s role in the world). The next steps would be to seek agreement from the multi-national Nuclear Suppliers’ Group, which meets in Vienna next month, and then to put a completed package to the US Congress in the New Year.

The next stage, as I outlined in August, would be for the Left to withdraw support from the government, which would then continue to operate as a minority administration till it is defeated in parliament, or until Congress decides to call for a general election. It is hard to guess when that withdrawal might take place because the Left does not want to precipitate an election. Congress on the other hand, while weak in grass roots organization, would face an election confidently because the main opposition party, the Bharatiya Janata Party (BJP) is in disarray, with no clear leader to take over from the ailing Atal Behari Vajpayee, the former prime minister. Recent opinion polls have indicated that Congress would return to power leading another coalition, and Congress activists have been energized by the recent appointment of Rahul Gandhi, Sonia Gandhi’s 37-year old son, as a general secretary of the party as her heir-apparent.

But a quick election is not in the cards. The government is being urged by America to finalize the nuclear deal as quickly as possible, ahead of the American presidential elections next November, so Gandhi and Singh would want to do that before going to the polls. In the meantime, it should be quite possible for the government to continue operating with a minority in parliament, supported by the Left on non-controversial issues – unless the Left becomes so enraged with the finalizing of the deal that it provokes an election-inducing crisis. Nothing is therefore definite – but best to bet for now on an election around March or April next year.

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Posted by: John Elliott | September 24, 2007

Reliance hits gasoline and worsening retail road blocks

Drive down major highways and you will sometimes see the almost unthinkable sight of the Reliance name on mothballed gasoline stations.

Mothballed petrol pumps on the Delhi-Jaipur highway - pic JE

Mothballed petrol pumps on the Delhi-Jaipur highway - pic JE

As you scan daily newspapers, you regularly see stories of problems that Mukesh Ambani’s Reliance Industries (RIL), one of India’s two largest companies, is having opening its Reliance Fresh supermarkets as traders in various parts of the country use street muscle and political support to block the expansion of a brand that threatens the rich pickings of middlemen, money brokers and local officials.

The latest news (and I’m updating this post to include it) is that Reliance has just dismissed 870 staff and closed its ten Reliance Retail stores in Uttar Pradesh (UP) because of physical attacks that have endangered staff and shoppers.

Mukesh Ambani is of course hugely successful, controlling and actively running one of India’s two biggest groups with a market capitalization that last week topped $100 billion (four times that of General Motors) – and personal wealth of $45 billion, which makes him the world’s fifth richest businessman, just $11 billion behind Microsoft’s Bill Gates.

But life is not as easy as it used to be. Till a few years ago, the Ambanis always won their battles. Now that’s becoming less true.

The slide started in 2005 when, following the death of Dhirubhai Ambani who founded Reliance, the business was split by his two heirs, Mukesh and his younger brother Anil, after a bitter public battle. Since then, Anil Ambani has tended to do worse than Mukesh, who has much better contacts with the current government. Anil failed to win contracts last year to rebuild and manage the Delhi and Mumbai airports that went to other companies, and lost a Special Economic Zone in UP when the state government changed. This month he has lost a direct battle over the price of gas from his elder brother’s off-shore fields.

The mothballed gasoline stations are significant because they show that Mukesh Ambani can no longer be sure that he will win when dealing with the government – especially when he is branching out into areas occupied by strong vested interests.

He launched what was to be a $1.2 billion network of over 5,000 stations four years ago, aiming to have 1,500 open by the end of 2005 and quickly become (as the family always does) a dominant player. But he reckoned without the clout of local politicians, who frequently hold the franchises of public sector gasoline stations, and arrange them for friends, and who do not like private sector competition. Well-established public sector companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum also resented the interloper and two other private sector entrants, the Essar group and Shell.

The problems stem from crude oil prices more than doubling since Reliance launched its planned network. The government kept the public sector outlets’ diesel and gasoline prices below cost (at around $4.5 a gallon) and subsidized public sector oil companies supplying the outlets. The private sector operators could not afford to drop their prices by about $0.10c a gallon to match the public sector, and the government – pressured by the political and public sector lobbies – refused to help. This led Reliance to stop opening new outlets once it had reached 1,300. Of that total, 800 had been allotted to franchisees and 200 or more of these have been mothballed, with the others continuing in business.

It is also significant that Ambani has not been able to quell violent opposition – sometimes inspired by political parties for their own reasons – to his retail plans. This has held up expansion in states such as West Bengal, Madhya Pradesh, Delhi, ORISSA and Kerala as well as causing this week’s closures in UP, though he is branching out into other retail areas with the first of a series of hypermarkets already open and a chain of 115 clothing stores due to start within a few days.

a RelianceFresh store in south Delhi

a RelianceFresh store in south Delhi

The current supermarket boom is India’s most socially significant business event of the decade because it will not only gradually transform shopping habits but will also change the lives of farmers who produce fruit and vegetables. That means gradually sweeping away a strong nexus of bureaucrats and traders who thrive in the current public sector-dominate

d food distribution system, which Reliance is seen as challenging. Ambani is having to trim his targets and delay supermarket openings. So far he has only managed to open about 300 stores, at least 100 short of his hopes, which does not augur well for a target set a year ago of 5,000 within five years.

The virulent animosity between the two brothers has led to them both trying to block the other’s plans. On the disputed gas prices, Mukesh Ambani persuaded the government to back him against Anil. Before the split, Reliance arranged to sell gas from its off-shore Krishna and Godavri field to a power station called Dadri that it was developing in UP for $2.33 per million British thermal unit (mbtu), the price at which it won a tender to supply a government power generating company (NTPC). In the split, the gas field went to Mukesh, while Dadri went to Anil. Mukesh then said he wanted to raise the price to $4.33 mbtu (only marginally higher than comparable prices elsewhere in Asia) because of the sharp increases in oil and gas marked prices. Anil argued that the $2.33 should not be changed and took the issue, which has a spin-off effect on gas prices, to the government – which has just ruled in Mukesh’s favor, trimming his price slightly from $4.33 to $4.20.

So the Ambani name has lost some of its clout and animosity between the brothers is making the situation worse. But the other lesson of this story is that there are still major areas where public sector-based interests, like the gasoline station operators and the food distribution traders, are trying to cling to the benefits of India’s old protected economy – even if it means taking on the previously unassailable Reliance.

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Posted by: John Elliott | September 18, 2007

Hindu religion and mythology hit a controversial infrastructure project

Infrastructure projects are rarely easy to implement anywhere in the world because of all the social and environmental issues that have to be accommodated, in addition to basic business considerations. In India it can be even worse because of unclear and changing government policies, complex and ill-defined environmental and other rules, difficulties over vague land ownership, and resentment among those displaced who see others becoming rich.

Even when a project has started, it can still go wrong. Religious sensitivities also intervene – highway projects frequently have to cope with temples and sacred shrines located in their path – but rarely do issues of both religion and mythology come into play as they have on a shipping channel in southern India.

This is a story that shows how the cauldron of religion, politics, ethnic groupings and regional differences that are a part of daily life in India can spill over into business and infrastructure development. The project involves dredging a shipping channel along the Palk Straits between the south Indian state of Tamil Nadu and the island of Sri Lanka, and it has been halted by a dispute that turns on the arcane point of whether an ancient Hindu god is part of mythology or someone who actually built a rocky bridge, now mostly submerged under the sea (bottom of map), across the straits in the path of the channel.

 

Not only has dredging been halted, but national politicians are caught up in the row, with one government minister being called on to resign, and the Hindu-nationalist Bharatiya Janata Party (BJP) berating the avowedly secular Congress Party that runs the government coalition.
 
The god is Lord Ram, the hero of the Ramayana, the Hindu religion’s most popular and important epic. He is said – at least 4,000 years ago – to have built a crop of rocks known as Adam’s Bridge (or Ram Setu) across the straits so his armies could rescue his wife Sita from the clutches of the king of what was then Lanka.

Ram has also figured in modern politics and is a sensitive and important Hindu figure – though in southern India he is sometimes also regarded as a symbol of attempted northern (Aryan) domination of the Dravidian south. Defending the project, M. Karunanidhi, Tamil Nadu chief minister (and a declared atheist), said last weekend that the Ramayana was “only a piece of fiction that allegorically represented the conflict between Aryans and Dravidians.”

First mooted by a British engineer in 1860, and then by the Indian government in 1955, the $600 million-plus 167km (104 mile) Sethusamudram Canal, as the channel is called, has always had its skeptics and critics. Though its supporters like to compare it with the Panama or Suez canals, it will take coastal ships of only up to 30,000 tons and will cut just 24-30 hours off their sailing time round Sri Lanka.

Environmentalists have complained about destruction of coral and the rest of the local eco-system, including the loss of a barrier that can hold back tsunami waves, but sand dredging has been under way for two years and is about 25% complete, though no rock cutting has started. Local business will be the main beneficiary, and the project is being determinedly steered by T.R. Baalu, India’s Minister for Shipping and a member of the regional DMK political party that is in power in Tamil Nadu. Palaniappan Chidambaram, India’s finance minister and a Tamil Nadu member of parliament, has also spoken in favor.

High court petitions however have tried to block the project and have asked for the site to be declared an “ancient protected monument.” These petitions were transferred recently to the supreme court, and work was temporarily halted. Arguing that the project should continue, the government last week sparked the current row by saying in a petition that Adam’s Bridge could not be called a “man made structure” and consisted of “naturally occurring formations caused by tidal action and sedimentation.” It added that the Ramayana could “not be said to be a historical record.”

The BJP accused the Congress Government of questioning the religious beliefs of millions of people, which led to the law minister, H.R. Bhardwaj, to backtrack and declare that “the existence of Ram cannot be doubted.”

Since then, politicians and officials have been passing the buck and a government inquiry has been started into who – possibly DMK politicians – inserted the insensitive lines (which apparently were not in some drafts of the court submissions). But, as usually happens in India, this fracas will soon no doubt vanish from the front page headlines that it has dominated for much of the past week, and the canal will eventually be built – a monument to the vagaries of trying to do infrastructure projects in a country with such a vast mix of cultures, beliefs and interests.

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Posted by: John Elliott | September 7, 2007

On the Road: Why India can win on some points against China

 While I was in Mumbai and Pune last week, I talked to engineering companies about how they can sometimes compete successfully with China – and why. One strong theme about “why” was that India’s openness, its democracy, and its people’s flexibility enables companies to be entrepreneurially better.

Put another way, those aspects of India that frequently drive investors crazy – especially its chaotic democracy, general confusion, and lack of discipline – can be turned into advantages that encourage the entrepreneurship and flexibility needed to be successful.

No one is of course claiming that India can beat China overall, but the views I heard are interesting because they show the growing confidence in some Indian companies that India has some special advantages.

M.V. Kotwal, a director of Larsen & Toubro (L&T), India’s largest and most international heavy engineering group, said that China is a “regulated economy which means suppression of independent thinking, and that limits entrepreneurial activity.” Kotwal knows the market – L&T has sold ten coal gasification plants totaling $350 million to China in the past three years. By contrast, in India “there is a lot of freedom of thought which means that talent is available, and people come out with solutions whenever they are given a chance.”

A similar view came from someone else with direct China experience – Anand Mahindra, managing director of Mahindra & Mahindra, a tractors-to-cars company that has bought a tractor plant there. He said that though Chinese workers on machine tools could beat deadlines, they did not have the flexibility to switch instantly to a different machine. “The Indian mind is not fazed by confusion and apparent disorder,” he said, “If there is a wrinkle on a dye, an Indian engineer will sort it, but a Chinese will want to fly in an expert.”

Baba Kalyani, chairman of Pune-based Bharat Forge, the world’s second largest forgings company which has a joint venture in China, made the same point when he told me that India won in manufacturing in “areas with multi-technological touch-points such as high grade metal castings.” But he warned that this was “the only advantage that we have” and that it “wouldn’t last long.” China would catch up fast.

I discussed this with Nandan Nilekani, a founder and co-chairman of Infosys, one of India’s top three IT companies, at a Delhi party this week, and he said that “for genuine innovation, you need an open society.” When I scribbled that down on the back of my invitation card, he said it wasn’t that profound a remark. Maybe he was right, but it’s interesting that it’s now being cited by engineering entrepreneurs to explain why they can beat China.

A different point came from Rajiv Bajaj, who I talked about in my last post. He said that “China does not have the same incentive to innovate because someone down the road copies you.” He cited as an example that, while Bajaj Auto is the only company producing its Pulsar motorbike in India, “there are six copies of Pulsars in China.” (Ironically, two days after he told me this, Bajaj became embroiled in a legal patent battle over motor bike ignition technology with another Indian autos company, TVS of Chennai).

Mahindra also made the point that China beats India massively with its vast and efficient network of highways and ports that enable raw materials and components to be delivered to factories, and products to be taken on to other destinations.

That India lacks such infrastructure was apparent when I was being driven last week to Bharat Forge’s Pune headquarters. Twenty minutes before my appointment with Kalyani, we were only moments away from the factory gates, but then we hit a traffic jam at a railway crossing. Twenty five minutes later we hadn’t moved as many yards so, after agonized phone calls between the driver and Kalyani’s office, Indian innovation came into play. I walked through the worsening gridlock of cars, dilapidated trucks, motorcycles, and bikes to the other side of the jam, where I was picked up in a motorized auto-rickshaw and chugged along to my interview, twenty minutes late.

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Posted by: John Elliott | August 30, 2007

On The Road: Bajaj pays employees to stay home

I’ve been traveling in Maharashtra this week, talking to engineering companies about how they have become internationally competitive, modernizing their manufacturing processes and turning out products that people want to buy – things that they didn’t need to worry about before the economic reforms of the 1990s, and that have begun to come good in the past few years.

Yesterday I went to Pune, which is re-emerging as a major engineering center, and met Rajiv Bajaj, the 40-year old managing director of Bajaj Auto, once a fantastically profitable scooter company and now being rebuilt as a leading and profitable motor bike business.

Rebuilding is precisely the right word to use because Bajaj has built two new factories in recent years and this week produced the surprising news that he is stopping manufacture of two-wheelers at a massive old plant adjacent to the group’s headquarters in Akurdi, outside Pune. Akurdi has been the home of the group since it started producing two-wheelers in 1960, so this is an emotional event. It will continue to house the headquarters and produce components, but it will no longer be the manufacturing and assembly base.

To achieve this with as little pain as possible, Bajaj has come up with an unusual solution. From this weekend, 2,200 employees are being told to stay at home and not report for work – on full pay, which will continue till their normal retirement. Many of them are in their 40s, so that is quite a long time to go on paying: but Rajiv Bajaj says it is no more expensive for the company, and may indeed be cheaper than a redundancy scheme that would involve lengthy and probably bitter trade union negotiations.

“This is the first time in India that someone has tried to do this – what is right for the company with no loss to the workers,” he says. Legally, if the employees find a new job, they should resign from Bajaj, but in India’s uncontrolled labor market, with many people holding more than one job, that seems unlikely to happen.

For the company, it makes sense because producing the two-wheelers at another factory saves it $25 per vehicle, which roughly covers the cost of paying the home-bound employees at the current production rate of 300,000 vehicles a year. Profits will be made when production increases – the two-year target is 500,000.

Bajaj says the plan is also better for the employees than a humiliating solution that is favored by some companies: making employees clock in each day but giving them no work to do. Bajaj’s trade unions are however threatening legal action.

The closure is tough on those involved because Bajaj admits that it is “not being done because of any failure on the part of the workmen or the management”. It is largely due to “the impact of government policies on capacity rationalization, chiefly the regional distortions created by inconsistent tax benefits and the continuing evil of octroi in the state of Maharashtra”.

Bajaj estimates that a third of his 1,000-rupee saving per vehicle will come from tax concessions elsewhere, a third from not paying octroi (an ancient form of state-level taxation collected on the borders of individual municipalities) and a third from rationalized production. The tax benefits refer to breaks available in under-developed areas, and both Bajaj’s new factories are in such locations.

Octroi has now been abolished in most Indian states and is not applied in special development areas, but it does operate for most of Maharashtra. It is levied at a rate of 4% on all goods brought into the area, and is not refundable when products leave. It causes massive traffic jams on highways, where trucks queue up at boundary collection points, delaying deliveries and leading to massive corruption.

“Octroi is nothing but an excuse to sustain corruption – lorry drivers pay bribes every day to the collectors,” says Bajaj. The problem is widespread. Jamshyd Godrej, chairman of Godrej & Boyce Manufacturing, a leading engineering products company, says his refrigerator and other appliance factories have been moved away from the headquarters site on the outskirts of Mumbai. The empty buildings have been leased to software companies such as Tata Consultancy Services, which escape octroi payments because they do not bring in hardware.

It is a pity to finish this post, which was supposed to be about modernizing engineering companies, with the perennial subject of corruption – but this is India.

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Posted by: John Elliott | August 23, 2007

India’s government risks being nuked

It is odd how political crises erupt, almost without warning. After just over three years of uneasy co-operation, India’s Congress-led coalition is suddenly vulnerable because friendly Leftist parties are objecting to a nuclear deal that has been struck with America. The government depends on these parties’ 59 parliamentary seats for its majority in the Lok Sabha (the lower house of parliament), so it would become a minority administration if it lost their support. We have got so used to the Left holding up a whole range of economic reforms and other government initiatives that we should of course have foreseen this crisis, instead of assuming that everyone would muddle along on the nuclear deal, as they have done on other issues, with the Left’s known opposition somehow being accommodated.

The Left is challenging the government because the deal dramatically changes India’s foreign policy not just on America, but also potentially on other countries such as Iran. Notionally the deal is about allowing India to have access to nuclear fuel and equipment from America and other countries for the first time in over 30 years, without having to sign the Nuclear Non-Proliferation Treaty. The idea is that nuclear energy should provide 20,000 MW of power by 2020, up from 4,000MW now – if of course India managed radically to improve its project construction capabilities and actually built the nuclear plants.

The Left, partly reflecting widespread reservations (and some opposition) in India about close relations with America, is objecting and wants the deal examined and possibly changed (which the government says is impossible). It is concerned that India’s freedom to stage nuclear weapon tests would be curtailed because America could then stop implementing the agreement, albeit only after lengthy consultations. But the Left and others argue, on a broader front, that India is putting itself in a position where it would have to toe America’s line on foreign policy – for example on Iran, with which India wants to continue years’ of friendly relations and build a gas pipeline. The government’s reply is, basically, that these fears are groundless.

Curiously, India’s constitution does not require governments to have international treaties approved by parliament, so there is no need for this highly significant foreign policy deal to be put to a vote when a parliamentary debate takes place, maybe next week after attempts to hold it this week ended in uproar. Meanwhile, there is a risk that the crisis could lead to the government falling. None of the parties in the coalition, nor the Left which is led by the CPI-M (India’s biggest Communist party), wants this to happen. A general election is not due till the first half of 2009, and members of parliament hate having their five years of power and patronage halted by mid-term polls, so they are urging their leaders not to allow the government to fall. That leaves several potential scenarios:

1. The government agrees to go slow on operationalising the deal with international nuclear authorities and America, while the details are analyzed, buying time with the Left.

–  CURRENT SHORT-TERM tactic which has already begun. It avoids an immediate crisis, but it could appear to go against what Manmohan Singh, the prime minister, has said about pressing ahead with implementation and might provoke his resignation if it endangered the deal.

2. The Left withdraws support. Sonia Gandhi, the Congress Party and coalition leader, and Singh tell India’s president that they will continue with a minority government. They move ahead on finalizing the deal with international nuclear agencies and America, which causes continual political friction and uncertainty. This continues until they are defeated in a parliamentary vote on a political issue or controversial policy or other political issue – maybe on next year’s budget (due February 28), if not before – which triggers a general election.

– LIKELY MEDIUM-TERM outcome, unless Option One produces an unexpected compromise.

3. Gandhi and Singh override the wishes of Congress’s coalition allies and Congress MPs and call a snap general election soon.

– POSSIBLE BUT HIGH RISK because Congress can only lead the next government if allies pick up sufficient parliamentary seats, which might not happen, especially if it does not have (or want) the Left as allies.

4. Gandhi decides to defuse the crisis and asks Manmohan Singh to resign, probably replacing him with Pranab Mukherjee, the politically astute external affairs minister. The nuclear deal is shelved, ending the confrontation with the Left.

– UNLIKELY because Gandhi has stood behind Singh and the deal so far. She also trusts Singh more than Mukherjee to hold the prime ministerial fort, without developing independent political ambitions, till her son Rahul Gandhi is ready to take over (though that take-over looks ever more distant, the more time goes by).

5. The Bharatiya Janata Party, which leads the parliamentary opposition, co-operates with the Left to defeat the government in parliament, forcing a confidence vote which the government loses.

– VERY UNLIKELY, even though it looks logical, because the Left cannot be seen to be co-operating with the Hindu-nationalist BJP.

6. The Left withdraws its opposition, or waters it down to such an extent that the deal can go ahead. The crisis ends, leaving an uneasy and sour relationship between Congress and the Left, but the government survives.

– MOST UNLIKELY because it would be too much of a climb-down for the Left.  

So where does that leave us? Simply saying that politicians are brilliant at solving political problems when they want to – which is what the government and the Left are trying to do now – but it’s hard to see how Singh and his government can last till 2009.

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Posted in India, India general election, Manmohan Singh, Rahul Gandhi | Tags: , , , , , , , , , , , , , , , , ,

Posted by: John Elliott | August 20, 2007

Democracy is not an end in itself

Hey folks – I’ve enjoyed your comments on my India 60th post, but there are some misunderstandings.

First, I don’t live in America, as some of you imagine, and I am not even American. I’m a British journalist and have lived in India for 18 of the past 24 or so years, first for the Financial Times in the 1980s and then, from 1995, back in Delhi and writing primarily for Fortune magazine and The Economist, plus the New Statesman.

And yes, I have traveled extensively – to all states in India, apart from the North East (which I’ve never written about in Riding the Elephant). In the past two or three years, my city visits have included Mumbai, Chennai, Hyderabad, Ahmedabad, Jaipur, Cochin, Agra, Jaipur, Varanasi, Lucknow, Jalandhar and Kolkata, plus elsewhere in areas such as Madhya Pradesh, Uttar Pradesh, Rajasthan, Orissa, Pondicherry and the Himalayan foothills.

So I’ve seen a lot of the country, not enough maybe, because nothing is ever enough in such a massive, varied and rapidly changing place. But I have to wonder, without wanting to be too confrontational, how my journeys compare with those of some distant comment writers.

I rarely, if ever, criticize the Indian people or the country. My targets are almost always corrupt indolent self-serving politicians, bureaucrats and others who slow the country down for their own benefit.

I first came here in 1982, when I was the London-based industrial editor of the Financial Times, to write articles on India. I’d spent 15 years or so reporting Britain’s economic decline and was fascinated by what I sensed was a country just beginning to grow and expand – extremely slowly, but nevertheless on the move.

I came back a year later to open the FT bureau in New Delhi, and reported events such as the Sikh troubles in Punjab, Indira Gandhi’s army take-over of the Golden Temple and her subsequent assassination, as well as the Union Carbide gas disaster in Bhopal. Then Rajiv Gandhi came to power and sowed seeds of modernization that have come good in the past few years – his contribution to modern India is frequently under-recognized.

In 1988, I was posted to Hong Kong, but came back in 1995, four years after the 1991 liberalization had started.

That was when I became aware of, and was horrified by, the appalling waste that I often write about today. Corruption was on the rise as the well-connected and powerful seized opportunities to amass enormous wealth, and the poor were being ignored.

These are the failings that lay behind my India 60th post. The country has done brilliantly, but could do so much better if public servants performed in the interests of the country and the desperately poor. Sure, the article was broad brush – the idea here is not to write more than about 700 words – but I covered the major points, and we will have a much broader and longer look in a special FORTUNE magazine spread of India articles at the end of October.

Most of the comments on my post praised India for the 60 years, despite China’s greater advances, while others disliked my criticisms. There frequently seemed to be a reluctance to accept that it is the job of a foreign reporter impartially to watch, learn, analyze and report what he or she sees. And some comments have been wrong – of course businessmen have changed, for example, since liberalization reformed the rules.
 
I knew my Uttar Pradesh-Bihar comparison with Pakistan would be attacked. The detailed situation in those two Indian states is of course quite different from Pakistan, but corrupt self-serving politicians in both those states and Pakistan have worked for themselves and their cronies, not for the benefit of the population. My main point was that both have lacked stable governance because democratic institutions have failed. The good news is that UP and Bihar now seem to be improving under their present chief ministers.

On the same day that my post appeared, Amartya Sen, the Nobel Laureate, wrote in the FT about how poverty rates had not come down as fast as they should have done and said:

“Some failures are huge, such as continuing undernourishment, particularly of children, and of course the scandal of a quarter of the population (including half of all women) remaining illiterate……A democratic country can hardly want to maintain a divisiveness that makes it part California and part sub-Saharan Africa”.

That may be a bit harsh, but few of the comments sent to this blog seemed willing to face up to India’s problems of poverty and dramatically widening gaps between the very rich and the desperately poor.

Of course democracy is great, but it is not an end in itself, which some writers seem blandly to suggest. It should only be a means to an end – governing a country well in the interests of all its people – and that sadly is not happening enough in India. OK, other countries have their problems too and are not perfect (including America according to several of you who live there) but this blog is not about those places. It’s about India.

Please keep the comments rolling – je

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Posted by: John Elliott | August 14, 2007

India at 60: A Nehru dream comes true

India knows it has something to celebrate Wednesday, the 60th anniversary of its independence from Britain.  That may sound obvious, but it isn’t, because 10 years ago many people said they were not sure what there was to be proud of on the 50th anniversary.

People bemoaned the country’s failure to get to grips with endemic social and infrastructure problems, especially poverty, education, health, roads, and power. There had been a spate of economic reforms after a humiliating international financial crisis in 1991, but they had sputtered to a virtual halt. Business was not doing anything very dramatic, and there were only glimmerings of the information technology-led boom and more recent manufacturing renaissance.

Today, many of the problems — especially social — are little improved. Vast proportions of the country’s 1.1 billion people are undernourished and hungry, as well as poorly educated and illiterate. Blighted by a lack of drinking water and proper sanitation, many are plagued with poorly-treated ill health.

But the country’s overall self-confidence, and its economic performance, is being transformed. In the past four or five years, a spirit of “can-do” has inspired businesspeople — big and small, ranging from names like Ratan Tata, Mukesh Ambani, Azim Premji and the Infosys founders to small niche players — who invest, manage, deliver, and grow both at home and abroad. Funds are more often than not raised legitimately, rather than via a friendly politician’s influence on a pliant public sector bank.

Companies operate in a mostly open market, knowing that they must manage efficiently and deliver quality or fail. Many of the names at the top of the business league tables have changed in the 10 years from old Marwari trading caste families, which thrived in a controlled economy, to new entrepreneurs. Family control of companies is still widespread, but the newcomers have an ambition to succeed in India and abroad that was previously often lacking.

That has been shown most dramatically by the recent surge of takeovers overseas, spearheaded by the Tata group and by IT and pharmaceutical companies. Similarly, the growth in the number of executives from abroad who are prepared to work in India — foreign as well as of Indian origin and not just on lucrative postings — reflects both the availability of internationally competitive salaries and a more conducive working environment.

Consequently, economic growth has risen in the 10 years from around 6% to almost 10%. The Mumbai stock market’s Sensex index has gone from under 3,500 to a peak last month of over 15,800. The rupee has recovered a decades-long slide and is now strengthening against world currencies (not just because of the declining dollar), and foreign exchange reserves have rocketed from $26 billion to around $230 billion.

India is also earning new respect as an international player, not least with the United States, which is on the brink of signing a nuclear deal that will transform the two countries’ diplomatic and business relationship

One the flip side, some things are getting worse. The quality of governance is declining, especially in the states, because many politicians and bureaucrats are becoming more corrupt and self-serving. Parts of the country are appallingly run, especially Uttar Pradesh and Bihar, which for years have been almost as bad as Pakistan in terms of political failure — and their economies are worse. Maoist Naxalite rebels control vast areas of other states.

There is little urban planning or respect for regulations: construction of new buildings takes little account of environmental standards or the need, for example, for adequate drainage and other services.

Even more seriously, the economic boom is leading to intense pressure on land in a country where 70% of the population relies on it for its living. In the next ten years, it is quite possible that social unrest will be caused more frequently by land disputes than by traditional religious and ethnic differences.

Despite these problems, India is on the move. When Jawaharlal Nehru, the first prime minister, made his famous “midnight hour” independence speech on August 15, 1947, he referred to India’s “tryst with destiny,” and called on people “to work and work hard, to give reality to our dreams.”

Ten years ago that work ethic had not materialized. Today it is operating in the private sector, generating most of the successes.

Think what could be achieved if the politicians, bureaucrats and public sector did the same.

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Posted in India, India independence, India politicians, Nehru-Gandhi dynasty, Ratan Tata | Tags: , , , , , , , , , , , , , , , ,

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