Businessworld
Kandula Subramaniam

India has an installed power generation capacity of slightly over 145 gigawatt (GW). Of this, over half, or 77 GW, is in thermal coal projects and another 59 GW in gas/liquid fuel power projects. While nuclear power capacity adds up to 4 GW, the balance is in the form of hydro and other renewable energy projects. At one level, the government promises to add over 780 GW of fresh capacity during the current Eleventh Plan, but even the existing assets are being underutilised due to fuel shortage. And a coal and gas shortage threatens to aggravate this by delivering substantially less than the 145 GW installed capacity.

This month, of the 77 coal-based plants, the number of plants with less than a week’s stock of coal stood at 48, and those with less than four days’ stock - dubbed as critical - stood at 25.

It gets worse when it comes to gas-based stations. Take, for instance, GVK’s new 220-MW Jegurudau power plant in Andhra Pradesh, which is ready but there is no gas supply. Commissioning of two other 909-MW stations (Gautami and Konaseema) is held up due to gas shortages. Documents accessed by BW show that the 41 gas/liquid fuel-based power projects — spread across the private and state sectors — barely get 58 per cent of their fuel requirements.


Despite all efforts by the Centre to revive the erstwhile 2,000-MW Dabhol power project (now called Ratnagiri Power) directly under the supervision of the UPA government’s first empowered group of ministers chaired by Pranab Mukherjee, the project still does not have an assured source of gas supply for the entire unit.

Ratnagiri Power (Dabhol) still does not have assured gas supply (Pic by Sanjit Kundu)

Some power plants such as Kayamkulam (350 MW) in Kerala; Maithon (90 MW) in Jharkhand; Basin Bridge (120 MW) in Tamil Nadu; Tanir Bavi (220 MW) in Karnataka; and the 174-MW Cochin project in Kerala are awaiting supplies that would allow them to switch over to natural gas from otherwise expensive alternatives such as naphtha.

Power tariffs are split into two components: fixed and variable charges. While the variable charge is dependent on the fuel consumption, the former takes into account return on equity, debt servicing requirements and operation and maintenance charges. In the event an alternative fuel is not allowed by the concerned state government, the contract period would be reworked and the time period would be extended to allow the recovery of the fixed costs. That way, the fuel risk and even the payment obligation are going to be borne by the final consumer.

Vote-bank obsessed politicians give priority to fertiliser plants and LPG extraction units from available fuel, leaving gas for power stations at third place.

Nuclear Power

Before the signing of the nuclear deal, the nuclear fuel shortage had forced the Nuclear Power Corporation to slash production of power to half of the plants' capacities.

The nuclear power industry has been a government monopoly; there will be influential voices within the government that will want to keep it that way. The current reactors will remain with the government, and it would make sense if the government expanded its programme with foreign technology to a certain extent, since it is important to keep the official nuclear establishment up-to-date. But much faster expansion of generation capacity can be achieved if the private sector is brought in at this stage to import and learn technology and construct atomic power stations.



It would be a good idea to choose half a dozen firms, contract them to build nuclear power stations, and leave them free to make or buy the technology, subject to technical supervision from the Atomic Energy Commission.

The French minister of state for foreign trade, Ann Marie Idrac, is currently in New Delhi to enhance trade between the two countries. With 58 standardised nuclear power reactors, France today has a leading and unique position in the world, thanks to the scale and continuity of its nuclear programmes, particularly in terms of safety and operational records. He said, "In 1998, France initiated the political process that led to the NSG granting an exemption to India on September 6, 2008. The successful completion of the process now offers India the possibility of cooperating fully with France on all aspects of civil nuclear energy, including the supply of equipment, nuclear material and reactors to India."

Three of the world's largest polluters — the US, China and India — still don’t see climate change as an economic opportunity. Instead, they resist cutting climate change-causing greenhouse gases on economic grounds. The troubling reality is that China (6.2 billion tonnes per annum) and India (1.34 billion tonnes) are the world’s lar-gest and fourth-largest carbon dioxide (CO2) emitters. The US is second with 6 billion tonnes and Russia third with 1.5 billion tonnes. But China’s and India’s emissions are growing at 11 per cent and 6 per cent a year, as opposed to US’s 1.7 per cent, and India will cross Russia by 2015.

In India, more than 60 per cent of business leaders feel the country should lead the way in green initiatives, says consultancy firm KPMG, which estimates this to become a $3-trillion industry by 2050. For example, GE’s Ecomagination initiative, which began in 2005 with 17 products and $700 million in research, today has 60 green products with $17 billion in revenues and $1 billion in R&D.

High Emissions Industries

For India to agree to cuts in carbon emmissions, western countries must transfer the latest clean technologies, such as hybrid car engines or energy-efficient machines, at subsidised prices. New Delhi must also press international donors, such as the World Bank, to provide subsidised capital to invest in these technologies.

From government estimates, coal-based power generation, which supplies 53 per cent of India’s total power (77GW) and emits 51 per cent of its CO2 (638 million tonnes), is India’s most polluting industry. To clean the power industry, players such as NTPC, Tata Power, Reliance Energy and Lanco must look at two things — next-generation supercritical boilers and renewable energy (RE) such as wind and solar power.

Supercritical boilers are manufactured by BHEL. Larsen & Toubro (L&T) has already invested Rs 300 crore in a plant in Hazira. Back-of-the-book calculations show that India’s 30,000-MW ultra mega power projects alone are a Rs 99,000-crore market for supercritical technology.


"Solar energy will provide 70 per cent of all our energy needs by 2100," says K. Subramanya, CEO of the Rs 670-crore Tata BP Solar. Likewise, wind power could add up to 100 GW — or 69 per cent of India’s current generation capacity — to the electricity grid, says Sanjeev Ghotge of the World Institute of Sustainable Energy.

The downside is that solar and wind energy cost Rs 20 crore per MW and Rs 5 crore per MW respectively, while coal costs Rs 3 crore per MW. Better tax breaks and higher feed-in tariffs such as those offered by the US and Germany, can boost renewable energy. A national solar mission will rapidly increase solar power’s contribution to the national grid — currently less than 0.5 per cent. There is also money to be made in building a more efficient power transmission grid.

About 30 per cent of a steel plant’s operating costs are for power, which is why Shishir Tamotia, CEO of Ispat Energy, invested Rs 84.7 lakh to maintain a steady blast furnace temperature, recover waste heat and gas, and install energy-efficient lights and air conditioners.

Transport generates 10 per cent of India’s emissions. With annual car sales expected to quadruple to 4 million by 2020, emissions will also increase. Now, car makers are investing in electric, hybrid and hydrogen vehicle research. In India, Bangalore-based Reva already makes the world’s best-selling electric vehicle (EV), and Mahindra & Mahindra and Tata Motors are also chasing the market with research in EVs and hybrids.

In India, a range of taxes — not counting import duties — raise cars’ basic cost by at least 20 per cent. If these taxes are waived for clean cars, their prices could match conventional-fuel vehicles.

Homes and SMEs

The US Green Buildings Council says American homes and offices contribute 38 per cent of the US’s CO2 emissions. India’s figures are lower because heater and air conditioner usage is lower. Even so energy-efficient buildings cost 5-10 per cent more, but they pay back within 3-4 years.

Companies such as Trane and Shristi Infrastructure are chasing what the Confederation of Indian Industry (CII) estimates will be a $4-billion market by 2012 for green buildings in India.

Earlier, consumers wanted cheaper products. So, retailing giants such as Wal-Mart went to China for these. Now, they want environment-friendly products. "Indian companies will be able to supply these," says David Wheat whose aptly named consultancy HaraBara Inc. helps SMEs transit to low-carbon mode.


However, Malini Mehra, director of the Kolkata-based Center for Social Markets, says SMEs (small and medium enterprises), which contribute upto 60 per cent of India’s GDP, need guidance. "They don’t have access to information or a clear and supportive policy environment that encourages transition to a low-carbon economy," she says.

India’s old-world economy needs new thinking to escape the trap set by high oil and commodity prices as well as the looming dangers of a high-carbon economy. India’s best bet is to get future engineers, managers and social workers to think green. The recently created Indian Youth Climate Network is one such initiative that will encourage inter-disciplinary thinking among the youth. "A strong green workforce will prevent the developed world from reaping all the benefits of clean and green economic development," says Ernst & Young partner Sudipta Das, adding that this would help Indian companies compete better internationally.

Businessworld
Pierre Mario Fitter and Alexis Ringwald

Businessworld

Government salaries already form 6 per cent of India’s GDP, and will rise further with the implementation of the 6th Pay Commission recommendations. The total increase for all states, the central government, the military, etc. could be nearly Rs 17,798 crore. This will certainly widen India’s fiscal deficit, which is already burdened with high oil subsidies and the Rs 71,600-crore farm loan waiver. Interest rates could face further pressure as the government looks to scrape together enough resources for the payout. Another area that could be hit is expenses on national infrastructure such as roads or ports, power grids.

The additional strain comes at a time when payments towards farm loan waivers, fertiliser subsidies and revenue losses from inflation-fighting measures — a total of about Rs 70,000 crore — also strain the exchequer. On top of this, the burden of the oil and fertiliser bonds could create some destabilising pressures on bond yields.


However it must be admitted that if the income per head of the Indian people is growing at something like 6 per cent a year, some increase in civil servants’ income beyond inflation is defensible. Without it, their incomes would fall behind the rest of the people. So we have the ritual of periodic pay commissions which, after long deliberations, make detailed recommendations stratified by the various caste distinctions within the government. The last pay commission submitted its report on 24 March. After deliberating on it for five months, the government announced its decision on the eve of Independence Day.

The central government is just the first amongst equals; below it are 29 governments of states and union territories. State government finances are generally in a pitiable state. But the economic boom of the past five years, together with the fall in interest rates, had bolstered their revenue and repaired their budgets; they seemed to be on the way to financial prudence. Those dreams of fiscal soundness must be forgotten now.

On the other hand Government employees do with salaries far below those in the private sector. In some cases, private-sector counterparts of top bureaucrats draw salaries up to 10 times higher. These inequalities make it difficult to retain good talent. The additional income for government employees will lead to higher consumer spends. In the long run, this will raise domestic demand, pumping money back into a weakened economy.


In fact this is exactly what happened with the 5th Pay Commission way back in 1997. The government employees, who form a substantial proportion of the Indian middle-class, received the increased salaries with retrospective effect in lump sums. While this certainly damaged the fiscal balance of both the central and state governments, the government employees' money led to increased consumer spending, which helped boost the economy in the same year when first the Gowda government and later the Gujral government had fallen and the main sectors of the economy had not performed so well.

So it needs to be seen what the government employees will do with their windfall; spend, save, or invest; and what impact will that have on the economy?

Many countries are eyeing the vast farmlands in Africa (Bloomberg)

Businessworld
Sumati Nagrath

Earlier, nations seeking more land for expanding populations (lebensraum or "living space", Hitler called it) went to war. Now, they go to real estate brokers. Countries such as Egypt, Libya, Saudi Arabia and Bahrain, which have growing populations and are heavily dependent on food imports, are leasing thousands of hectares of cultivable land in countries such as Brazil and Australia to grow food grains.


Lester Brown, founder of the Earth Policy Institute, says Libya has leased land in Ukraine to grow wheat and ship it back to its hungry population. Egypt and Saudi Arabia are said to be eyeing the farmlands of Pakistan and Sudan.

The concern is that food exporting nations such as Thailand, Vietnam and the US may choose to hoard food grains instead of selling them, given the growing global food shortage.


Although the world is not quite on the brink of starvation, almost all countries are doing everything they can to ensure food security for their people. The land lease solution may seem innovative but it could open up a whole new can of regulatory worms.

Regulations governing agriculture are diverse, complex and localised. There is a need for international coordination with regard to agricultural techniques and inputs such as seeds, feritilisers, pesticides and soil that countries deploy in their newly-acquired land. Still, most experts applaud the move, as it helps even out the world’s current imbalance between population and land distribution.

Businessworld
Bill Emmott

In what feels like the blink of an eye, the emerging markets have been transformed from global suppressors of prices to sources of a new wave of inflation. The vehicle for this transformation is the price of oil and, to a lesser extent, food, both driven higher by strong demand in China and elsewhere. In reality, though, the ultimate means by which inflationary pressure is being transmitted is a more fundamental commodity: money.


Excess liquidity in countries ranging from China to India to Saudi Arabia has pushed inflation rates higher all over the world. Yet when the developed countries’ credit crunch began in August last year, deflation looked a greater danger: the abundant savings in emerging markets offered hope that a deflationary spiral could be avoided.

From a global point of view, one country’s central bank is more important than the others: China. The reason is two-fold. One is that China is the developing world’s biggest economy, the world’s fourth largest, and one of the most open to trade. So its economic performance affects others. The other reason, though, is that China’s liquidity and its rapid, resource-intensive growth in the past five years has been a big force behind the rise in price of oil and other commodities.

If Chinese demand continues to grow, then the oil price is likely to carry on rising, intensifying the inflationary pressure worldwide. But if the People’s Bank of China (PBOC), the country’s central bank, were to raise interest rates sharply (which are now well below the rate of inflation), bank lending growth would be cut and the economy would slow, cutting also China’s demand for oil. The only way to achieve this would be for the PBOC to allow the Renminbi to appreciate much more rapidly against the dollar and the euro, ceasing its purchases of foreign currencies.


For that reason, some analysts suspect the announcement in June of a slowing of the annual inflation rate from 8.5 per cent to 7.7 per cent may have reflected political manipulation of the data to buy time. If so, the pressure on oil prices and on global inflation may remain uncomfortably strong at least until after the Chinese summer, and the Olympics, have passed. In the autumn, however, the government’s nerve might well return. Inflation needs to be defeated.

Bill Emmott

This is the era of books about the rise of new eras. Notable books recently published make an attempt to answer what will come next? What are the trends in shifting evolving world power?

Fareed Zakaria, the editor of Newsweek International, says that the world has seen “three tectonic power shifts” in the past 500 years, by which he means great changes in the distribution of international power. First there was the rise of the western world, which began in the 15th century. By the western world he presumably means Europe, since his second shift was the rise of the US, which he dates from the final years of the 19th century. And fionally a post-American era, which he also calls “the rise of the rest”.


This era is otherwise known as globalisation, a period during which the US’s long post-1945 effort to convince others of the merits of free trade and liberalised capital markets has finally paid off. But having talked of a 400-year western era, then a 100-year American one, the evidence that this new era is a third tectonic shift, relies on statistics and anecdotes from a handful of years. This jump from broad sweeps of history to contemporary analysis is where the problem of era books arises.

Parag Khanna, a scholar at the New America Foundation in Washington DC, in his The Second World, promotes the idea that the world is now going to be dominated by three big countries or blocs: a declining and (he thinks) incompetent US; a peaceable European Union; and a rising, bumptious and potentially aggressive China.

The trouble with this thesis is not what it includes; it is what it leaves out. What about the other countries that are growing and are getting more powerful? Brazil, Russia, India, South Africa, Mexico, Iran and many more will not buckle down easily to three global “empires”, to use Khanna’s chosen term.

Robert Kagan’s The Return of History and the End of Dreams, says that we are in a multi-polar world in which many countries are becoming powerful, nationalistic and ambitious, and in which the rules of the game will be disorder and unpredictable behaviour.


In truth, this messy, multi-polar world has been evident since the end of the Cold War. In that time, the US’s stance has fluctuated, from the “reluctant sheriff” in the title of a 1997 book by Richard Haass, now head of the Council on Foreign Relations in New York, to the “indispensable nation” cited by Madeleine Albright when she was Bill Clinton’s secretary of state, to the unilateralist approach of President Bush. But the essential trend of the world has not changed in that time. Whether or not that makes the period a new era, or just a further phase of American leadership, is a question best left to historians in decades or even centuries to come.

When IDFC was set up in 1997 based on the recommendation made by the Expert Group on Commercialisation of Infrastructure Projects under Rakesh Mohan (1994-96)— there were several sceptics who said in private that it was a classic case of dissipating capital.

IDFC has, over the years, expanded its business footprint and it now has a private equity arm, brokerage and investment banking, a mutual fund, and only the last piece that every finance institution wants to have is a bank within its fold is missing. See private equity in infrastructure:

In march 2003, IDFC private equity closed its first infrastructure-dedicated fund of about $200 million.

IDFC acquired Standard Chartered Bank’s mutual fund (MF) business for $205 million in March this year. This MF will not only help IDFC connect with a retail audience, but it will also have another arm in its fold to raise money and invest. The MF business has very low regulatory barriers, it has low capital requirements and the returns are high. Market penetration by MFs is largely in the top ten cities.

In the case of wholesale funding, IDFC’s borrowings costs are exposed to sharp hikes in interest rates and tightness in market liquidity. Second, its business model has relatively higher portfolio concentrations compared to banks; and third, as a finance company platform, there are limits in leveraging relative to banks.

IDFC is also handicapped by the fact that there is no corporate bond market in India. The tenure of the longest IDFC bond is 10 years, even though there is a 30-year bond issued by the central bank, RBI. IDFC, therefore, willy-nilly lands up borrowing from banks to the extent that they are the biggest subscribers to IDFC’s bonds.

In August 2006, the RBI started regulating IDFC as a non-banking finance company (NBFC) instead of a public financial institution. It further placed a cap of 15% of total funds, on the amount IDFC could lend to a single borrower, which severely limits IDFC's investments in big infrastructure projects.


IDFC also bought 8.2 per cent in National Stock Exchange (NSE) for about $20 million, and within six months of this deal, NYSE, General Atlantic, Softbank and Goldman bought a total of 20 per cent in NSE, valuing the exchange at $2.5 billion.

In February 2007, IDFC also set up a $5-billion fund to finance infrastructure along with Citigroup, India Infrastructure Finance Company (IIFCL) and Blackstone Group. Of this, $2 billion will be in equity capital ($1 billion each in quasi-equity and equity) while $3 billion would be in long-term debt with financing maturities exceeding 10 years.

India continues to set up newer entities for financing infrastructure, but the Middle Kingdom’s State Development Bank of China has been responsible for at least part-funding mega projects: the multi billion dollar Three Gorges Hydel Project, the Beijing-Kowloon Railway and the $3.5-billion Daya Bay Nuclear Power Project in southern China.

Businessworld
Dhanya Krishnakumar

Under the national semiconductor policy, the Centre agreed to bear 20-25 per cent of the capital expenditure of a semiconductor manufacturing or associated facility, including solar cell fabrication units (fabs), during the first 10 years. This led to spurt of interest and investments in solar energy, which is based on photovoltaic cells.

Photovoltaic refers to the creation of voltage from light. SPV systems directly convert sunlight into useful electricity. This process is called the photoelectric effect. The energy generator in a PV system is the solar cell, which are essentially thin wafers of silicon. These cells when connected in series and parallel constitute a solar panel.


That was the trigger for many players to rush into the solar photovoltaic (PV) space. With over $7 billion worth investments in PV units sanctioned in the new Fab City that is coming up in Hyderabad, and close to Rs 600 crore set aside for R&D in this area in the Eleventh Plan, the government’s solar programme is finally showing signs of growth.

The project phase itself takes about two years and only then will we get a clear picture of how much actual installed or generation capacity many of the players really have. India’s theoretical solar power reception just on its land area is about 5,000 trillion kWh per year. The daily average solar energy incident over India varies from 4 to 7 kWh/sq mtr. with about 2,300-3,200 sunshine hours per year, depending on location. This is far more than current total energy consumption. Which, even assuming 10 per cent conversion efficiency for PV modules, will still be a thousand times greater than the likely electricity demand by the year 2015.


Tata BP Solar recently signed an agreement with Calyon Bank (Credit Agricole CIB) and BNP Paribas to raise Rs 3.1 billion to fund its solar cell expansion project from the present installed capacity of 128 MW to 300 MW by 2012. Players such as California-based Signet Solar are also planning three PV manufacturing units in India at an investment of over $2 billion. Moser Baer is investing close to $1.5 billion; Titan Energy Systems is planning an investment of $750 million, Nanotech Silicon India $2 billion, and Hindustan Semiconductor Manufacturing Corporation $1 billion.

Reliance Industries has also approached the government with plans to set up a semiconductor wafer fabrication plant and solar PV module unit at a total outlay of over Rs 30,000 crore.

Moser Baer India is the first company to invest about $1.5 billion in thin-film photovoltaic and has plans to ramp up to 600 MW over the next two years from the existing project capacity of 40 MW. This will be done in partnership with Applied Materials. Moser Baer India's thin-film photovoltaic manufacturing capacities for crystalline silicon and thin film technologies are coming up in Greater Noida and Sriperumbudur.

At the current 20 per cent annual growth, India can emerge as the fourth largest generator of solar energy after Germany, Japan and China in the coming years.

Businessworld

Kenneth Rogoff

Today’s soaring commodity prices scream a fundamental truth of modern life that many politicians, particularly in the West, don’t want us to hear: the world’s natural resources are finite, and, as billions of people in Asia and elsewhere escape poverty, western consumers will have to share them.

The US’ ill-considered bio-fuels subsidy programme demonstrates how not to react. Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for bio-fuel production. Never mind that this is hugely inefficient in terms of water and land usage.


Another wrong turn is the proposal recently embraced by two US Presidential candidates to temporarily scrap taxes on gasoline. But this is not the way to do it. The gas tax should be raised, not lowered. The sad fact is that by keeping oil prices high, OPEC is doing far more for environmental conservation than western politicians who seek to prolong the era of ecologically unsustainable western consumerism.

It is not just oil prices that are high, but all commodity prices, from metals to food to lumber. Prices for many have doubled over the past two years. Oil prices have risen almost 400 per cent in the past five years.

Admittedly, the global commodity price boom has had profound, albeit enormously complex and uncertain, effects on poverty. While surging commodity prices are helping poor farmers and poor resource-rich countries, they are a catastrophe for the urban poor, some of whom spend 50 per cent or more of their income on food.

For now, though, instead of whining about high commodity prices, governments should be shielding only their very poorest citizens, and letting the price spikes serve as a wake-up call for the rest of us. The end to western consumerism is not yet at hand, but high commodity prices are a clear warning that big adjustments will be needed as Asia and other emerging nations begin to consume a larger share of the global pie.

True, when today’s global economic boom ends, commodity prices will plummet, easily 25 per cent, quite possibly 50 per cent or more. Western politicians will cheer, and many pundits will express relief that less money will be flowing to undemocratic countries in the developing world.


ET

Gold prices in the 1970s, Japan’s equity market in the 1980s and tech shares in the 1990s all witnessed similar cyclical bear markets amidst secular bull runs. During their previous major bull phase from 1987-94, even emerging markets suffered two major setbacks of 30% in 1990 and 20% in 1992.

Research shows that commodity prices always lag the economic cycle and start to fall in earnest only four to five months after a major economic slowdown sets in. Admittedly, over the past decade emerging market demand has come to be the most important factor in determining commodity trends.

But changes at the margin matter the most in driving prices and US demand is still relevant for commodities such as oil. The US consumes just under a fifth of the total global oil output and latest data reveal that oil demand in the US is down 7% from a year ago.

Rising oil prices are currently the biggest obstacle in the way of stock markets rallying any further. Much of the bad news regarding the US credit crisis has already been discounted and valuations are supportive enough to engage long-term investors.

Lower oil prices will ease inflationary pressures and allow equity market valuations to expand again. In short, for the script of a secular bull-run in emerging markets to remain on track, commodity prices led by oil need to come off the boil, pronto.

Businessworld

Omkar Goswami

OPEC was formed as a permanent inter-governmental organisation in September 1960. From its inception, OPEC’s objectives have been explicitly cartel-like; OPEC has 13 member countries. It began with five: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Subsequently, others joined the organisation: Qatar, Indonesia, Libya, the UAE, Algeria, Nigeria, Ecuador and Angola.

As I write this article, the OPEC’s weighted average basket is quoting at $111.66 per barrel. More ominously, on 28 April, OPEC president Chakib Khelil, Algeria’s oil minister, warned of the prospects of crude at $200 per barrel.


In fact, until 2007 the OPEC was not viewed as a price-gouging cartel. Barring 1973 and 1979, it has see-sawed between cutting and raising quantities. Till September 1999, crude was below $20 per barrel; and it remained below $30 right up to March 2004. So, what has made the OPEC so successful in not only maintaining hard prices, but steadily stepping these up to over the $110 mark?

Economists will tell you about the rising demand from India and China, uncertainties in supplies, and the role of commodity speculators. These are valid reasons. But to my mind, the biggest factor of them all is a man called George W. Bush.

If Bush had only alienated Hugo Chavez of Venezuela, the oil-consuming world would have breathed easier. But he has put off Iran, the UAE and, most importantly, its biggest oil-producing ally, Saudi Arabia. Gone are the days when the President of the US could have a quiet word with the King, and have the Saudis exercise restraint on the OPEC. Not so long ago, Bush’s father, George W.H. Bush, was welcomed as an honoured guest of King Fahd at Riyadh. Today, King Abdullah doesn’t feel the same about the son or his emissaries. For instance, Dick Cheney’s last avisit to Saudi Arabia was only politeness. The Saudis are irritated with Bush’s confrontational style; the US upsetting their neighbourhood, and not bothering to consult with them.


Thus, Thanks to Bush’ bellicose body language, the Saudis watch from the sidelines. Not once since September 2007 has the largest producer in the OPEC spoken of increasing supplies to dampen prices. With the Saudis remaining quiet, every other producer is making hay, including US-haters like Mahmoud Ahmedinejad of Iran and Hugo Chavez.

The US has become public enemy number one in the Middle East. And we are all paying the price. Long live Dubya!

But Saudi Arabia has resisted attempts by OPEC members to discuss the declining value of the American currency and thus decoupling Oil and the Dollar.

Businessworld
Srikanth Srinivas

The International Monetary Fund’s (IMF) World Economic Outlook (WEO) — a biannual report published every April and October — has estimates of 3.7 and 3.8 per cent of projected global growth for 2008 and 2009, which are lower by a full percentage point since January this year. The slowdown will be more persistent than earlier thought, it seems.

True, much of this slowdown will be felt in the US; growth prospects for that country have deteriorated more rapidly: Growth estimates for 2009 are 1.2 per cent lower. As US banks and financial institutions continue to take hits to their assets, those already pessimistic projects could go even lower: the WEO points out that if global growth falls below 3 per cent, we will be in a global recession. The probability of that happening is estimated at 25 per cent.

But there is a silver lining. Emerging markets, led mainly by China and India, will boost overall global growth, says the WEO; any slowdown in those economies is likely to be moderate, as they have no exposure to the credit crisis that has gripped the US and Europe.


Major concerns

The WEO identifies three major concerns that could impact the global economy more adversely that it has already:

Inflation — led largely by higher energy and food prices — is rising all over the world.

A price boom in the commodity markets. At least in part, says the IMF, the recent run up in commodity prices could be the result of investors seeing it as an alternative asset class.

Third, the financial shock emanating from the collapse of the housing markets and the subprime mortgage market crisis has inflicted considerable damage to institutions at the core of the financial system. Low liquidity in inter-bank markets and weak capital adequacy in banks has fuelled concerns about credit risk.

Risks for emerging markets

While India and China (and other emerging markets) will continue to experience high growth despite the global slowdon, their economies too will have to deal with some looming issues:

High on the risk table for emerging markets — including India — is high and persistent inflation. The producer price index — or the wholesale price index (WPI) in India shows some cause for alarm. In both China and India, producer prices show double-digit growth. Producer prices — mainly oil and raw material inputs — are rising faster than consumer prices.

Agricultural production — and given food price inflation — is a cause for concern. Tightening liquidity conditions, perceived high interest rates, a domestic credit shock and capital outflows together could be the perfect storm that drives growth rates below 6 per cent.

Prospects for India

Finance Minister P. Chidambaram doesn’t think that such a big drop in growth rate is likely either, even as he acknowledges that a slowdown may be necessary to bring down inflation, particularly food price inflation which can be critical in this election season.

We are reasonably self-sufficient in major commodities, and the food supply is more or less in balance. But food prices and commodity are likely to remain high, driven by growing incomes; but how much of that inflation is permanent and how much temporary is to be seen.


So while India may be relatively insulated from the contagion of the credit market, this is no time for complacency either. As IMF’s Johnson says, now is the time when prudent governments should draw up contingent plans to guard against deeper ‘tail risks’ — the risk that an unlikely event that can create catastrophic results.

Businessworld

Lacking adequate irrigation and remunerative support prices, the Indian farmer continues to suffer at the hands of an uncaring bureaucracy, manipulative politicians and avaricious moneylenders.

More than 280 farmers have committed suicide in Maharashtra’s Vidarbha district since January. The government says that more than 100,000 have killed themselves between 1997 and 2005 .

In Vidarbha, the main cause of suicide is indebtedness to moneylenders, who often charge interest rates of up to 40 per cent on loans.

Though the government has announced a Rs 3,750-crore aid package for indebted farmers, and a Rs 60,000-crore write-off of small farmer loans held by public sector banks, these do not offer any relief to farmers who have taken loans from traditional moneylenders. In fact, 116 farmers in Vidarbha have committed suicide since New Delhi announced its loan waiver.


Both, the state governments and the Centre have also shied away from using existing usury laws to go after the moneylenders, who often hold powerful positions in political parties.

Given the global rise in food prices, which is enriching farmers in countries such as Australia, Brazil and the US, various farmer organisations, such as the Vidarbha Jan Andolan Samiti, are pressing the government to raise the domestic support prices on crops. But New Delhi is refusing to budge.

Businessworld

Raghu Mohan

Annual inflation, which soared to 6.68 per cent by 15 March, can mar the political fortunes of the UPA at the next General Elections. Lehman Brothers’ (India) economist Sonal Varma says that rising global commodity prices — food, energy and metals — have put upward pressure on domestic prices. While the price pressure has been relentless across-the-board, it’s the sharp escalation in manufactured products’ prices in recent weeks that has caused this significant up-tick.

Union Commerce Secretary G.K. Pillai has made it clear to iron ore miners to come up with a solution to knock down steel prices. “We won't wait for even a month,” he told reporters in New Delhi this week when asked for a timeframe. Other categories that have contributed to higher inflation are edible oils, pulses and processed food.


“What a difference three months can make,” says HSBC’s economist Robert-Prior Wandesforde. “In November last year, WPI was running close to 3 per cent, well below the central bank’s 4-4.5 per cent target. Although not (yet) at a level likely to be triggering panic within policy circles, the pace of increase must be of concern. In our view, a further sharp rise looks probable.” HSBC has revised its WPI forecasts upwards to show a 6.2 per cent average rate for 2008-09, and a peak of 6.5 per cent at end-2008.

On 31 March, the Cabinet Committee on Prices, chaired by Prime Minister Manmohan Singh, announced a slew of measures to curtail inflation. It cut the import duty on refined oil (sunflower, soya bean, coconut and groundnut) and on hydrogenated vegetable fats to 7.5 per cent (from 20 per cent), on butter and ghee to 30 per cent (from 40 per cent), and on maize to nil (from 15 per cent) for an upper limit of 500,000 metric tonnes. Additionally, it also imposed an across-the-board ban on the export of non-Basmati rice, raised the ceiling on the minimum export price on Basmati exports to $1,200 from $1,000, and extended the ban on export of pulses by a year.

Will the measures on edible oils work? “China and India are the two biggest importers of vegetable oil, together accounting for 30 per cent imports of major edible oils. India is expected to import 15 per cent of both soy and palm oil,” says Standard Chartered Bank’s senior economist for India, Shuchita Mehta. “Given the recent rally in edible oil prices and that prices would remain on elevated levels going forward, the heat doesn’t seem to be going off.”

Prior to the announcement of these measures, RBI Governor Y.V. Reddy said, “Inflation is unacceptably high. We are very, very concerned. We are in full readiness to take appropriate action to contain inflation.” The cash reserve ratio (CRR) — the money that banks keep as a percentage of their deposits with the RBI — is now at 7.50 per cent. In the RBI’s armoury, the CRR is the most blunt weapon, and it is clear that it will not hesitate to crank up the CRR to arrest liquidity, and, in turn, inflation.


But there is a fundamental question. Is the current rise in inflation a monetary or a supply-side issue? If it is the latter, how are monetary measures going to curb inflation?

It is also likely that the Centre may defer large expenditure and maintain higher cash balances with the RBI in April and May. Prior-Wandesforde is of the view that the Centre, which had shown its hand in the 2008 Budget targeted at the rural poor, will presumably await the verdict of opinion polls and local elections before deciding when to hold the general election; and if further measures are required.

Daily Star

In a real turn up for the books, the World Bank's latest report released here has stated that India received the largest amount of remittances from migrants in 2007--all of US$27 billion--followed by China, Mexico, the Philippines and France.

The Chinese expatriate community spread across the globe has for long been thought to have been the unquestioned leaders when it came to sending remittances back home; indeed, remittances have been a major driver of economic growth in the Communist country.


India, now, has knocked China off the top spot with its $27 billion remittances while China comes in a close second with remittances worth $25.7 billion in 2007, according to the World Bank.

Mexico ($25 billion), the Philippines ($17 billion), and France ($12.5 billion) make up the top five. (Tajikistan, Moldova and Tonga were the top remittance-receiving countries as a percentage of GDP.)

“In many developing countries, remittances provide a lifeline for the poor,” said Dilip Ratha, senior economist and co-author of the Migration and Remittances Factbook 2008.

He added that remittances are "often an essential source of foreign exchange and a stabilising force for the economy in turbulent times”.


In terms of migration, the United States of America was the top immigrant-receiving country with 38.4 million immigrants, followed by Russia with 12.1 million and Germany with 10.1 million.

Businessworld
By Bill Emmott
The author is a former Editor of The Economist.

If the US slides into recession, it will be due to the billions of dollars lost by banks in the subprime mortgage market. Unlike in earlier slumps, there is no point in blaming foreigners. The problem lies at home.

Moreover, part of the solution is coming from the countries that protectionists expected to gain popularity by attacking: China, other Asian countries, and the Arab world. Their state-run investment funds, known as ‘sovereign-wealth funds’, have provided more than $70 billion in new capital to the big Wall Street commercial and investment banks.

My former employer, The Economist, described this as “the invasion of the sovereign-wealth funds” in its 19 January 2008 issue. These huge funds, which economists at Morgan Stanley reckon command total assets of $2.9 trillion, may be saviours today but soon enough, says The Economist, rich-country politicians will start to attack them for gaining too much control over strategic investments and for harbouring political motives. Protectionism may be silent today, goes this argument, but tomorrow it will be noisier than ever.


The Economist has influential company. Larry Summers, who was Treasury Secretary under Bill Clinton, wants sovereign-wealth funds to be regulated in a special way. Last September, I attended a debate about this between Summers and Jose Angel Gurria, the former Mexican finance minister who now heads the OECD in Paris.

In the debate, Gurria took the position of an economic liberal: open capital markets were vital for global prosperity, and it would be counter-productive to place obstacles in the path of such investment funds. All that was needed was a code of conduct. Nonsense, said Summers, it would be naïve to rely on codes and transparency. In his view, such funds cannot be relied upon to act like normal, profit-seeking investors. They might want to secure foreign technology for national strategic interests, for instance.

The Economist did not argue for special rules covering sovereign funds, but it did agree that these funds are likely to provoke a backlash amongst rich-country politicians.

So, what are the public-policy implications of these funds’ rise? If oil and commodity producers continue to build up vast balance-of-payments surpluses and if China continues to accumulate foreign-exchange reserves, the Sovereign-Wealth Funds are going to get bigger.


This issue needs to be sliced up in two ways. The first: for whom might these funds be a problem? The second: what type of behaviour would merit special rules? If you look at the recent rescue of Wall Street banks, the “for whom” question matters greatly. For the US government and for taxpayers, the rescue is not a problem; it has saved them huge sums. The problem is really one for the banks’ shareholders and creditors, for these investments have diluted shareholders’ rights and in some cases established preferential claims on the cash flows of the banks.

The “what behaviour” question is also illuminated by the bank rescue. All the investments in those banks are minority stakes. Only if the sovereign funds were to buy controlling stakes could their behaviour become an issue.

The right conclusion is that sovereign-wealth funds require no special rules as long as they buy only minority stakes. Only when they take controlling stakes should they be given special scrutiny or be subjected to special rules.

Three state-owned oil marketing companies (BPCL, HPCL, IndianOIL) will jointly pump in $600 million, or Rs 2,400 crore, in Brazil to buy/lease plantations and related units for producing ethanol, a byproduct of the sugarcane industry blended with petrol to make "gasohol”.

TOI

Oil fields and coal mines are passe. India is now poised to make its first overseas acquisition of sugarcane acreage in search of altenate fuel energy security.

Ethanol is considered less-polluting than petrol and its progressive use is seen as reducing dependence on oil imports.


Brazil is the world’s biggest sugarcane grower and leads in gasohol usage with upto 25 per cent blending. India, with its inadequate ethanol supplies, has been doddering with efforts to introduce 5 per cent blending as opposition from sugarcane lobby and alcohol industry have blocked efforts to raise supply.

A team of executives from Bharat Petroleum, Hindustan Petroleum and IndianOil has initialled documents for working out deals to acquire 15-35 per cent stake in two of the largest ethanol players in the Brazilian sugarcane industry— Louis Dreyfus Commodities Bioenergia and Infinity — and 50 per cent equity in new plantations/projects of smaller firm Rezek.

Indian oil firms will form a joint venture company for ethanol investments and share half of the equity in it. The remaining half ownership will be offered to the Brazilian partners. Most of the investment will be equity contribution from the Indian oil companies as local debt is not available for financing acquisitions in Brazil. The joint venture will be based in Brazil for tax benefits.

Brazil allows foreign ownership of sugarcane acreages which are rain-fed and require little irrigation. The plantations are mechanised with integrated sugar mills.

Several European firms have acquired acreages and taken up ethanol manufacturing for captive use in their home country.

One way of making sugar useful...even if it is foreign sugar!

Businessworld
Omkar Goswami

Thanks to a compounded annual growth rate upward of 8.6 per cent over the last four years, Mr Chidambaram has had an enviable situation of an overflowing exchequer. Net direct tax revenues to the centre grew by 42 per cent to Rs 217,149 crore, which was over four-fifth of the budget estimate for 2007-08.

The government is in its final lap, and this budget will be structured with an eye on impending elections. That implies an expansionist budget targeted at rural India, the social sector, employment generation and micro and small enterprises. I, therefore, expect significant percentage increases in outlay on the various planks of the Bharat Nirman programme, such as drinking water and sanitation, rural roads, rural electrification and rural housing. I also expect more on Sarva Shikhsya Abhiyan, the mid-day meal scheme and the National Rural Health Mission. Most likely, the largest absolute increase will be on the National Rural Employment Guarantee Scheme.


The second factor is the distinct possibility of an economic slowdown. Mr Chidambaram is a realist who understands numbers, especially early warning signs. Given the present state of electricity, roads, highways and ports, it is very unlikely that industry can expect to continue growing at double-digits. Growth of the Index of Industrial Production has fallen from 11.2 per cent in April-December 2006 to 9 per cent for April-December 2007, and is trending down. My estimate is that India will be looking at a GDP growth of between 7.5 per cent and 8 per cent in 2008-09. Lower growth may require some expansionary sops. And I believe that the FM will offer a few, without too much pressure on the fisc.

The third factor is a guillotine called the Seventh Pay Commission. Mr Chidambaram had the misfortune of being at North Block when the Sixth Pay Commission was implemented. It seriously hurt the exchequer and scarred him as well. He knows of the pressures for substantial increases in civil service pay; and he knows how it can rock the exchequer. The FM will need to stash away a sizeable chunk of revenues to make these payments. And to go easy on major expenditure outlays, knowing that a big splurge is around the bend.

The fourth factor is fiscal rectitude, and the Fiscal Responsibility and Budget Management Act. Will Mr Chidambaram meet the Act targets for 2007-08 and 2008-09, and leave a much stronger exchequer? I believe he would want to; but he may not be able to, given the possibility of a slowdown, bigger pays and election-year sops.

On balance, what should we see? Lots of stuff on social sector expenditure; some sops to industry; a hold on reducing customs duties; talk on additional resources to meet pay commission recommendations; some talk too on the need for a strong exchequer; and, of course, couplets from Thiruvalluvar and other poets. High on politics; but basically safe. Or so, I hope.

Businessworld
Rajesh Gajra

Over the past two weeks, a surfeit of tea and coffee has been consumed, all thanks to the turbulence in the initial public offering (IPO) market, otherwise known as the primary market. Investment bankers and promoters of companies have been spending their days holding long meetings in the midst of their IPO offer periods to decide whether to abort planned IPOs, due to the sudden withdrawal by investors of all stripes: retail, high net worth individuals and even institutional investors.

Blame the meltdown in global equity markets in January - in the middle of a colder than normal month. But how much of a link is there between the secondary markets that saw huge losses, and the primary markets, where capiutal is being raised for ostensibly good projects? “Sentiment is a common thread between primary and secondary markets,” says Pankaj Vaish, MD and head of equities and fixed income liquid markets at Lehman Brothers in Mumbai. “Aggressively priced IPOs and those with massive oversubscriptions, without full financing, can signal that perhaps the market is getting too hot, as they did most recently.”

While the weather has gotten warmer, the once red-hot IPO market has been reduced to cold ashes. In what under normal conditions would have been a breeze, three high-profile IPOs — Wockhardt Hospitals, Emaar MGF Land and SVEC Constructions — had to withdraw their IPOs due to complete lack of investor interest.


Where Have All The Investors Gone?

“Realisation is dawning on many investors that IPO valuations may be on the high side,” says Stuart Smythe, executive director and head of equities, Macquarie Securities India. “They are becoming rational now and their risk appetite has been moved by recent global market weakness.”

For retail investors, the Reliance Power IPO was a rude wake-up call about the vagaries of the market. The stock was expected to list at close to Rs 1,000, going by the trade in the grey market. While it did open higher than the offer price of Rs 450 on 11 February, by the end of the trading day it closed down much lower. Secondary market behaviour since then has been erratic; the Bombay Stock Exchange Sensitive Index (Sensex) has been behaving like a yo-yo.

One segment that has been severely affected are the leveraged HNIs (high net worth investors) who took severe losses on IPO bets gone wrong, particularly Reliance Power IPO. Even as BW goes to print, there are settlement problems in the grey market, with investors unable or unwilling to pony up on the wrong bets they placed. For HNIs, the IPO market is going to be off-limits, at least for a while.

The Ripple Effect

The withdrawal of three high profile IPOs has severe implications for the equity market. “The IPO market is important from the economic perspective; it gives opportunity for companies to raise resources and acts a channel for investors to invest in such companies,” says Devendra Nevgi, CIO of Quantum Asset Management, managers of Quantum Mutual Fund. “When companies withdraw their IPOs you have to ask whether they really required the money in the first place.”

The second question that looms large is one of valuation. The fact that majority of IPOs in the last year have listed at a 10-100 per cent premium over the offer price raising questions about whether the fundamentals of the business and the markets justified the price. "If an IPO is priced at a premium to regional and local peers, global money managers struggle to justify assessing a new offering at a premium, when their existing holdings are at discount, or comparables are trading at fairer values than a new offering," says Macquarie's Smythe. For instance, the price to earnings ratio of Emaar, a realty company, was much higher than the listed realty stocks like Unitech and DLF that had fallen steeply in the secondary market slide.

Will Sanity Return

The secondary market prices of newly listed IPOs have also seen a correction in their prices. The most dramatic case was the Rs 10,123 crore IPO issue of Reliance Power. Issued at Rs 450, with a discount of Rs 20 for just the retail investors, it got listed on 11 February. It was the first big IPO in recent history that traded at a discount to the issue price on the day of listing. Its average traded price on the National Stock Exchange was Rs 416.80.

Though not completely unexpected, the dramatic withdrawals of IPOs have bought the investment bankers to some senses. So will things change?

In fact Reliance Power, trying to brave the turbulence in the markets, has announced that each investor with shares of the company will be compensated for his/her capital loss by being issued free bonus shares. The decision will be taken on Feb 24 at a board meeting.


As the news became public Reliance Power stocks soared nearly 12 per cent on the National Stock Exchange and touched a high of Rs 430, price at which shares were allotted to retail investors. The stock rose 11.67% in the BSE and even pulled up the rest of the market to the 18,000 level.

The board would also consider other measures that could reduce the cost of Reliance Power Ltd shares below the IPO price of Rs 430 per share for retail investors, and Rs 450 per share for institutional and other categories of investors, the company had said.

Smart move to reduce the turbulence in the market. Also a way of maintaining its reputations since the ADAG (Anil Dhirubhai Ambani Group), which owns Reliance Power, has other IPOs to float: Reliance Infratel and Reliance Entertainment.

Operators and investors continue to bleed at the Stock Market, partly due to greed and partly due to global uncertainties. After the withdrawal of the Wockhardt IPO, the real estate (realty) firm Emaar-MGF also withdrew its IPO——and while investors were licking their wounds came the real shocker.

Reliance Power, which had expected to net $3.5 billion from its IPO, had declared an issue price of Rs 450 per share. The company had expected the retail subscription to take the price close to Rs 900 per share——in the end it was a dampener, closing the day at Rs 372.30, following hefty selling by investors.


This debacle has forced other companies ot rethink their own IPOs. Globus Spirit, a liquor (IMFL: Indian Made Foreign Liquor) company, has withdrawn its IPO. Realty firm Uppal is postponing its Rs 2000 crore IPO, while BPTP another real estate company is re-thinking its IPO plans.

Despite the bearish trend, companies like Rural Electrification Corporation and GSS America Infotech are going ahead with their IPO plans. RECL is entering the markets on February 19 with a price band of Rs 90-Rs 105 per share while GSS America, whose issue opened on Monday, is coming with a price band of Rs 400-Rs 440 per share.

Even the government is worried. It has proposed to set up an "IPO pricing norms" committee to change the way that issue prices are determined——presently by the company and the merchant bank managing the issue.

Meanwhile the real India growth story continues on the ground——this time in Kutch. Rs 27,000 crore has been invested in the region's infrastructure, which has been devastated by the earthquake of 2001. Rs 75,000 crore more is expected in the next four years. The reason for this windfall of private equity in infrastructure is the state government. The first thing it has done is to build world-class roads in the region; and then encouraged the private development of power plants and ports. Secondly it walks the talk on fast track clearances of projects. Gujarat takes only three months to approve a project, which in most other states may take up to year.


Watch this story on video:
http://portfolio.moneycontrol.com/india/video/stockmarket/14/47/newsvideo/325678

Businessworld
Rajesh Gajra

This month opened with a bit of drama. On 1 February, when the Sensex shot up by 3.3 per cent, both foreign institutional investors (FIIs) and domestic institutions were net sellers on the combined cash market of NSE and BSE. Their net sales — Rs 127 crore and 115 crore, respectively — were small but without a net purchase of Rs 500 crore by FIIs, it is difficult to raise the market.

During the January crash, retail and domestic institutional investors were net buyers, while the FIIs and brokers were sellers. But the trend seems to have reversed in February. Retail investors did net sales of Rs 370 crore on BSE in the first three days while brokers’ proprietary accounts took in net purchases of Rs 107 crore.

Are operators driving the market?

Well at least the operators of Wockhardt Hospitals are not driving the market. Their IPO, on the strength of which the Wockhardt expansion was to take place, failed to attract investors and has now been withdrawn :
Reuters
Rina Chandran

India's Wockhardt Hospitals Ltd has shelved its initial public offering, becoming the first Indian listing hopeful to pull its deal as market turbulence saps appetite for risk.

India's stock market soared 47 percent in 2007, its fifth year of a bull-run, and had $15.8 billion initially in the IPO pipeline for 2008 -- more than double the size of last year.

Concerns that the credit crisis would trigger even deeper write downs for banks and financial institutions and a looming U.S. recession have caused many companies in Asia to shelve IPOs.

Healthcare services provider Wockhardt said late on Thursday it was pulling its offer to raise up to $165 million after it got subscriptions for only a fifth of the offering of 25.1 million shares. The company had extended the period and cut the price after initially hoping to raise up to $197 million.

Emaar MGF Land, the Indian joint venture of Dubai's Emaar Properties EMAR.DU, which aims to raise up to $1.64 billion, had to cut its price band twice and extended its IPO by three days to Feb. 11.

Major IPOs in waiting include a $1.5 billion offer from the tower unit of mobile firm Reliance Communications, a $500 million issue from mutual fund firm UTI Asset Management, and a $635 million offer from Bharat Oman Refineries, a venture of Bharat Petroleum Corp and Oman Oil Co.

Foreign funds, buyers of a record $17.4 billion in Indian equity in 2007, have sold about $2.5 billion net in shares so far this year.

Experts say infrastructure development in India is still at a nascent stage and there is much more room for growth. Infrastructure cannot be imported and needs to be developed in the country....for this sector India will need $470 billion over the next five years.

Businessworld
Piya Singh

In march 2003, IDFC private equity closed its first infrastructure-dedicated fund of about $200 million. "At the time, it was quite a coup considering very few people believed in infrastructure," recalls IDFC Private Equity’s President and CEO Luis Miranda. Soon, Miranda had promoters lining up with proposals at his office. Some offers were dubious while others were full of execution risks. It took IDFC a year to make its first commitment. The fund also had little experience in the sector. "We invested Rs 100 crore in GMR Energy’s power businesses as I was very impressed with the promoter’s execution skills," says Miranda. "But we didn’t have experts in the power sector and getting approvals and NoCs from banks was difficult. Even though we signed the term sheet with GMR Energy in August 2003, the deal was closed only in March of the next year."


Five years later, Miranda is amazed that significantly larger deals are closed in just a few weeks and investors are even compromising on basics like the due diligence process. "There are entrepreneurs telling me to make up my mind quickly as they have three other potential investors waiting in queue," he adds. Miranda has a point. Last year, according to data collated by global accounting firm Grant Thornton, six PE deals of more than $500 million were struck out of which four were in the infrastructure sector including telecom infrastructure and real estate (Tata Realty & Infrastructure investing in logistics and GTL Infrastructure shared telecom towers).

This year, deals only promise to get bigger led by the infrastructure sector. For instance, Essar Power that plans to set up three power plants with a combined capacity of 3,600 MW is in talks with several large funds to raise $600 million out of a total capital outlay of $4 billion. Sterlite Power is reportedly looking at raising $1 billion from PE players and financial investors in a pre-IPO placement. The company plans to put up 10,000 MW of capacity across India at a total investment of Rs 40,000 crore. GMR Energy is also learnt to be in talks with funds for some proposed ventures even as the holding company GMR Infrastructure recently raised a billion dollars from a clutch of PE players. Telecom infrastructure also witnessed several large deals last year and this momentum is expected to continue this year.

Temasek, Goldman Sachs, Macquarie along with some other PE funds invested a billion dollars in the tower business of telecom provider Bharti last year while the infrastructure unit of Reliance Communications raised $337 million. This year, Tata Teleservices, which also plans to hive off its tower business into a separate entity like Reliance and Bharti, is also expected to raise funds from PE players for its telecom infrastructure business.

This ‘power and tower story’ may also be responsible for inflating valuations, say bankers. "There is a lot of hype around infrastructure and there’s too much money chasing deals. People seem to have forgotten that PE investments in infrastructure can be risky with delays in execution, court case, accidents — all of these have financial implications," says Miranda. Ernst & Young’s National Director for Transaction Services Jayesh Desai agrees. "While valuations need to be looked at on a case-to-case basis, in some infrastructure deals, the valuations are unbelievably high".


However, despite high valuations, PE’s interest in Indian infrastructure is unlikely to wane. A lot of the momentum is supply-led. PE funds under pressure in home markets such as the US have been focusing on the sub-continent where deals are smaller and so is the amount of debt raised in most transactions. "I expect PE funds to invest much more in India’s infrastructure. Out of a total $50 billion of PE funds that I expect to flow into India in the next five years, a substantial portion may be invested in the sector," says JM Financial’s Executive Director for Investment Banking, Bhavesh Shah.

However, the momentum in PE is part of that in the entire financial system. According to a recent report by Morgan Stanley’s Managing Director, Ridham Desai, called India Strategy — The future of our business continues to be sparkling, the country’s structural liquidity story is intact and gets reinforced with the passage of time. The report states that it expects savings into equities over the next 10 years to accumulate ten fold over the previous decade’s total to $350 billion at the current exchange rate. "The structural liquidity story is also likely to support capital market businesses of investment banking, broking, fund management and investments as we roll into 2008," the report adds. "By 2017, equity mutual funds could be managing $500 billion in assets, the market may be trading over $14 billion in securities, brokerage firms may be generating revenues of $9 billion and investment banks may have $500 billion in cumulative equity issuances."

Despite the big numbers, PE funds may be forced to keep a close watch on returns. It may serve them well to keep their expectations in check even though early movers like Miranda claim to have made seven times their investment in companies like GMR Energy.

More Infrastructure Funds

The Brazilian Sugarcane Industry Association (UNICA), represents the top producers of sugar and ethanol in the country's South-Central region, especially the state of Sao Paulo, which accounts for 60% of the country's total production. Along with its 101 member companies, UNICA develops position papers, statistics and specific research in support of Brazil's sugar, ethanol and bioelectricity sectors. Its membership accounts for about 50% of Brazil's sugarcane harvest. In 2007, Brazil produced 425 million metric tons of sugarcane, which yielded 29.8 million tons of sugar and 17.7 billion liters of ethanol.

Yahoo Finance

A report called "Deadly Brew," aired on Thursday, Jan. 24 by Bloomberg Television, is a dangerously misleading and out-of-context representation of Brazil's sugar and ethanol industry, according to the Brazilian Sugarcane Industry Association (UNICA).

"The report relies on isolated incidents, flawed data and unsubstantiated allegations. Not surprisingly, it arrives at unbalanced and inappropriate conclusions that bear no resemblance to the industry as it is today," says UNICA President and CEO Marcos Jank.

The report is seriously out-of-date according to Jank, as it not only omits wide-ranging advances in labor conditions and relations between workers and employers, but also chooses to portray industry efforts to introduce mechanization and end the manual harvest in a gradual and orderly manner as a problem and not a solution. At the same time, the report strives to criticize the manual harvest itself.

"Bloomberg appears more interested in showing impressive footage of a fire burning in the night than explaining that this is how straw is cleared virtually wherever sugarcane is harvested in the world," says Jank. The fact that close to 40% of the Brazilian harvest is already mechanized is not even mentioned, while signed agreements between the industry and labor unions that have brought significant improvements to worker transportation, transparency in payment methods and protective equipment standards were equally ignored.

And while nobody in the industry will argue that problems still exist, they must be put in the right context, something the Bloomberg report fails to do as it focuses on examples far removed from the accepted norm in the Brazilian sugar and ethanol industry, in a clear attempt to imply that exceptions reflect the entire industry.

A partial list of misrepresentations in the report includes:

-- The completely unsubstantiated statement that conditions have
deteriorated while ethanol has expanded. For example, close to 95% of
all field workers involved with UNICA member companies are documented
workers, with labor and social security benef