Defense Out of Purview of Offset Clause ?

Business Economics & Services Team ( BEST)
                      

                                          Defense Out of Purview of Offset Clause ?


There was a news item put out by Press Trust of India (PTI),  India's wire agency, tucked in some remote corners of a leading financial paper , which suggests that defense is taken out from the purview of offset clause. Along with defense, the other sectors that will be off the purview of the offset clause are atomic energy and space.
One has to be very careful in taking the story in the face value since defense offset was a major head for attracting exports from India. Offset clause stipulates that import of certain segment of goods like defense, aerospace, power etc. will have to be made good by sourcing minimum of 30 % of the value of goods from India. It is applicable to import contracts worth more than Rs 300 crore.  Offset policy can take various forms and hues depending on specific sector. It is a fact that there was widespread demand for overhauling India's offset policy, particularly relating to defense sector. The reasons cited as large scale opaqueness of the system leading to large scale  unscrupulous practices, bias in  sourcing of products and the occasional scams surrounding them, such as linking such incentives with the middlemen as a part of their illegal pay off etc.

Admittedly, India is amongst top  countries in terms of defense expenditure and third largest importer of defense hardware. Offsets in defense trade are a global phenomenon. More than 130 countries demand offsets in one form or the other. Percentages vary like 174 per cent in Austria, 118 per cent in Netherlands, 100 per cent in United Kingdom, 27 per cent in Thailand and 20 per cent in Taiwan.

It is too early to check the veracity of the story since the proposal prepared by the commerce ministry will be considered by the  committee  of secretaries  headed by the cabinet secretary. If this group takes a decision to exclude defense from the purview of offset policy, it will amount to a radical step and the first conscious step by the Modi administration to weed out corruption from defense deals and the kudos should go to them.Many governments in the previous years tried in vain to streamline the process. The more they tried more they caught into the labyrinthine shenanigans of a practice perpetrated over the years. 

Going by the sheer volume   of India's defense imports and the fact that indigenization will be time consuming, a hasty decision will have its own ramifications. One, there will be huge benefits to forgo, unless alternative schemes are put in place. Two, despite the gut feeling of the government that local manufacturing can be  fast tracked  by allowing formation of joint venture projects in the defense sector, the results may not be encouraging since the foreign companies have developed a vested interest in supplying equipment and not manufacturing them indigenous. Thirdly,  the joint ventures to be formed in the future may harp on producing the low-end machinery and not the state-of-the - art machinery, with imminent complications perceived by the foreign investors like compulsory licensing, patent violations etc.allegedly to be rampant in India and their feeling that Indian administration and judiciary are heavily poised against the investor.

Undoubtedly, the news about taking out the defense sector from the purview of the  offset clause  is a welcome step, but has to be cautious and calibrated.  

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Confusing Economic Signals Thwart Development Process

Business Economics & Services Team (BEST)


                                    Confusing Economic Signals Thwart Development Process


The other day, we heard that the index of industrial production registered the  lowest ever growth of 4.2%- lowest ever in the last three years or so - riding on the slow pick up of the manufacturing, particularly capital goods sector. Today, we hear that the economic outlook is not as gloomy as it is projected. Despite the slow industrial growth, credit to industry has grown by 11.3% by the  end  of November as compared to the same period in the last year. If we have to believe the figure released by RBI, the industrial growth is showing signs of good pick up.
The rating  agency - CRISIL- also has come out with a positive outlook on the economy. Bereft of the figures that it has doled out to substantiate its hypothesis, there is a massive pick up of implementation of the  projects cleared in 2013-14. Majority of the projects, which were struck in policy paralysis have started rolling out. Not only that. The projects cleared by the new government, which assumed office in May this year,  are being implemented on a fast -track.
What does it mean? Is the all round clamor by industry for a rate cut based on lack of pick up of the economy is wide off the mark or the cry of the industry is checkmated by selective leaks from the RBI to prove the point that all that is made out by industry and trade is bordering a  Oliver Twist  syndrome: more you give more they want? It seems newspapers also have changed the tracks. Finacail papers which have argued for rate cuts through their carefully planned plants and industry specific stories campaigning for a rate cut have now taken u -turn in their stand and now are publishing stories and edits that support the RBI governor. Does it mean that RBI governor has won the game, discounting even  the veiled suggestion of the finance minister for a rate cut?

The most unfortunate part in the entire episode  is the role played by the banks-both public and private ones. In order to lend credence to the pro-interest rate lobby's demand for a rate cut, on their own, they have brought down the deposit rates  arbitrarily. While do so, they said that they are making an enabling situation for the RBI to go for a rate cut. Why the cut on deposit rate? That is possibly the easiest thing that they can do without getting any sanction from any source. Should RBI call for an explanation from these banks what prompted them to go for a rate cut?  The primary objective of the bank nationalization back in 1971 was to salvage the banks from the clutches of  vested interests, who decided what to be done and what not to be done. The overriding principle  of nationalization was to commit the resources of the country to larger interests of the nation. Is that purpose served? Do the banks carry out due diligence before taking such steps like deposit rate reduction or play to the gallery? These are some of the issues that have to be introspected to ensure transparency in bank functioning.
Industry also will have to introspect on what they should ask for. It is high time that they work out a correlation between rate cuts and industrial pick-ups. Also, rate cuts and easy land acquisitions alone will not bring about industrial pick up. They have to assume a more responsible role that when they get the scarce resources from institutional sources, they should realize that they  are playing with the peoples' money and should be accountable for omissions and commissions committed on that. The scarce resource should be put to use in the most prudent manner.
It is also important that the brick and mortar industry has to de-link from their past and try to emulate some of the knowledge based industries. This segment has come up  on its own and not by availing loans and equities from the institutional sources. Even if they have taken loans, their repayment  rate is strikingly good.  They have also created millions of employments in the country and a lot of millionaires, who have become their stakeholders either as employees or shareholders.  People have reposed faith in them and the same thing cannot be said about the brick and mortar industries.             

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Is Gold Standard on its Way Back?

Business Economics & Services Team (BEST)

                    Is Gold Standard on its Way Back?

How many wars are fought for gold? How many people would have capriciously held gold thinking that it added to their wealth? How many stories would have spun around gold? How many women would have cried and envied for gold on seeing gold in other women’s body or ornament box? How many times gold would have been sold ever since it was mined out from mother earth? How much gold would have been destroyed ever since it was reckoned as a precious metal?  I will not be able to quantify any one of these posers except the last one. Why because I do think gold is a indestructible metal. If it is lost in one form, it comes in another. 

If it is lost in the sea because of  ship wreck by now it might have been swept on to the sea shore more shining since the existence limbo in the womb of the sea would have made the metal more precious and glittering. It might have been  buried there untouched by human hand. Those gold which is still buried, be it in sea or in war chests underneath mother earth  to make them undetected from the enemies or robbers are  still there awaiting a farmer’s pick axe to plough it out of  the deep slumber it is undergoing.

When Times of India today reported that three gold financing companies in Kerala hold more gold in the custody than total reserves of  a few countries including Switzerland, many would not have surprised. But that is only the quantum of gold in their safe vaults pledged by the people in distress. (Gold pledging is a taboo among many in India since it signifies that the person or family  have fallen into bad times). The quantum of gold under the safe custody of the three companies is over 1000 tons. Going by that, the total gold with the Keralities alone  will amount to 100 times more than that if one goes by a conservative estimate. Kerala is only a tiny state and the mean income of the people, to my understanding, will be lower than most of the other states, where there is a huge difference between the incomes of the rich and poor or let us put it in this way-gold with the rich and poor. If you put together, all these gold stocks together, I have a lurking feeling that the total quantum of gold in India, will be matching that of the For Knox’s reserves or anything closer to that.

Why Gold Precious?  Everyone, cutting across geographies and cultures believes that gold is valuable. What gives it value: its golden shine, imperishability or scarcity? May be a judicious combination of these factors could have catapulted the yellow metal to its prime of position.  Over time, it became a means of payment for the reason that it concentrates the highest value in a limited space.

It was US President Nixon in 1971, who put the gold into the back burner. His decision widely referred as “Nixon Shock” delinked gold from dollar.  Until then, dollar banknotes could be redeemed in gold, at an official exchange rate of $35 per ounce. Without the link to gold, the Federal Reserve could now print and lend as much money as it pleased. Since then, the gold in Fort Knox shrank to less than 1% of the value of the currency in circulation. But elsewhere gold demand picked up. Use of gold in medicine, telecommunication and computer industry has increased in the recent days. Unlike in petrol, there is no cartel operating in the case of gold, where a few producers decide the price and what quantity to be produced. We can reasonably be sure that value of gold will continue to be high and the prices do not drop unlike in the case of petrol. Experts are of the view that petrol prices may be dropped below US$ 45 per barrel from a meaty price of US$ 120 or so sometime back.

Will there be a spurt in gold production? Opinions vary. Some feel that the gold mining will be dropped down considerably on account of the higher cost of production and  hazards involved in mining them out. When gold prices drop, it may not be economical to mine them out. That will lead to a  steady decline in production. Since most of the gold is used for either reserves, security  and as ornaments, the price increase may force people to liquidate their gold holdings to some other assets. There is also another argument that sometime down the line gold will be mined from other planets like Mars, Moon, Jupiter etc. where there could be higher deposits of gold and other minerals. Admittedly, there is a section of astrophysicists who believe that minerals are particles that have been brought by meteorites.  When they colluded with the earth millions of years ago, those particles remained with us hidden below the surface.

     

Will there be a return of gold standards? Many think so and too with sound reasons. Governments have been printing paper  money recklessly. This has had two important adverse impacts. One, inflation has been a part and parcel of  every economy. Two, fiscal deficit created by most of the economies thanks to easy rules for printing money is creating havoc to most of the economies. In the past ten years the money supply in the world has more than  trebled, while the economies have shrunk. Different forms of credit creation by banks had swelled the economies and people have lost faith in the intrinsic of value of currency. Self-imposed codes for restraining money creation have fallen flat on several economies.

Against these backdrops, many sincerely feel and hope that the gold standard should be brought back to lend a value to the currency you tuck it in your pocket or wallet. Will it  happen soon is the trillion dollar question?

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Bayer’s Plea on Compulsory Licensing Dismissed by Apex Court

Business Economics & Services Team (BEST)

              

  Bayer’s Plea on Compulsory Licensing Dismissed by Apex Court

In a significant development, the apex court of India has dismissed yesterday the Special Leave Petition (SLP) filed by the German pharmaceutical company –Bayer -against the decision of the Bombay High Court granting compulsory license for the manufacture of a lifesaving drug –Nexavar-used for the treatment   kidney and cancer diseases.

The facts of the case are in brief are the following:-

The Controller General (CG) of Patents Designs and Trademarks of India in March 2012 granted Natco Pharma Limited ("Natco"), an Indian drug manufacturer, a compulsory license for Bayer’s Nexavar (sorafenib), an oncology drug. The condition was that Natco should produce the drug at a fraction of the cost sold by the Bayer and to   pay 6% royalty on sales to the latter.
 Aggrieved by the Order of the CG, Bayer  went in appeal before the Intellectual Property Appellate Board (IPAB)and also sought interim relief in the form of stay to the operation of the CG Order. The IPAB denied interim relief to Bayer and later in March 2013 passed an Order dismissing the appeal and upholding the CG Order. The IPAB however, in its Order raised the rate of royalty on sales to be paid by Natco to Bayer from 6% to 7%. IPAB also held that the government was using its rights under WTO norms to issue compulsory licenses. It added though Bayer had obtained a patent for Nexavar in India in 2008, it could not make available the kidney and liver cancer drug on a large scale and at an affordable price, within the stipulated time.
Bayer  challenged the IPAB order before the Bombay High Court, which held that it did not find any merit in interfering with the IPAB Order. The case came to the apex court in the form of an SLP before a bench consisting of  Mr. Justice Ranjan Gogoi and Mr. Justice R F Nariman, who dismissed the company's appeal on the ground that  lower courts had already ruled against the company's claim and that it had not shown any fresh research and development expense figures to warrant court interference.  
Bayer argued that there was a substantial question of law involved since the lower courts’ orders were violative of IPR rules and the company  had spent substantial amount for research and development.  The Supreme Court asked Bayer about the cost of developing the drug and why it had not submitted the details on R&D expenses involved in developing the drug to the Controller. The apex court noted that the company had realized   expenses on developing the drug in the first year itself based on the records produced before the DC
Implications of the Judgment.
Health activists across  country welcome the decision and maintain that it was landmark judgment and set the trend for similar cases. It may be noted that a large number of multinational companies operating in India in diverse fields like pharmaceuticals, electronics, telecom etc. have expressed their concern about the circumstances on which the compulsory licenses are granted by Indian authorities.  Their apprehensions are that some of the decisions are taken without granting an opportunity to the patent holders to protect their  interests. Many feel that this decision will impact the future flow of investments into the  country.  
(Readers are requested to go through the case studies in details to understand the line of arguments of parties involved)
For more information, pl contact jthac1234@gmail.com,jthac1234@yahoo.com Mobile 9810516770

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India's Economic & Investment Updates (3)

Business Economics & Services Team (BEST)

                                              India's   Economic & Investment Updates (3)
1. Industrial output dips
India's industrial output slides y 4.2% year on year in October 2014 mainly triggered by contraction in the manufacturing sector output by 7.6%. However, mining  has shown remarkable growth  at 5.2% as against a decline in the same period in the previous year (-2.9%). The electricity generation has impressively picked up during this time and grown by 13.3 % as against 1.3 % for the previous year . The most significant fall was for capital goods sector (-2.3%). The consumer durables contraction (35.2%) was also significant ofr the same period. Importantly, the retail price inflation has come down by 0.8 %.

2. Supreme Court Dismisses Bayer Plea Against generic Drug

The Supreme Court of India dismissed the Bayer appeal on the compulsory license issued on Nexaver-a drug for treating   kidney and cancer.and upheld the  Bombay High Court decision to give compulsory license to a Hyderabad based pharma company - Natco Pharma-to ahead with its plan, ending the litigation

3.RBI Governor For Boosting the Domestic Demand
The RBI Governor has underscored that the make in India plan should be focused mainly on boosting the domestic demand and not necessarily on increasing the domestic demand. The RBI Governor seems to be concerned about the inadequate aggregate demand, which must have pulled down the manufacturing growth.

4. Lok Sabha Passes Coal mine Auction Bill
The lower house has passed the bill for fresh auction of 204 coal blocks cancelled by the Supreme Court,paving the way for early solution of the problem. The bill is expected to be introduced in the Upper House -Rajya Sabha in the coming days.  

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........And Finally Insurance Sector in India Hiking FDI Limit

Business Economics & Services Team (BEST)


                                 ........And Finally Insurance Sector in India Hiking FDI Limit

If there is no slip between the cup and the lip, the government is going to hike the threshold limit for FDI participation in the insurance sector from the present level of 26 percent to 49 percent. For at least seven years, this proposal was in a limbo thanks to the political resistance exerted by the opposition parties, particularly the left parties. Even now some of the opposition parties are  against  it. The support the main opposition party-Congress-is likely to give for  the passage of the bill, it is most likely it will be gone through in the Rajya Sabha, where the ruling alliance does not have sufficient numbers. Undeniably, it was during the rule of Congress led alliance the bill was mooted and it is their moral responsibility to back it as a responsible opposition group. 

The net impact of the proposed bill will have to be objectively assessed. With the opening up of the insurance sector, there are now more than 25 private players in the field.  Many of them  of them are incurring loses ever since their inception. These beleaguered insurance companies will be able to shore up their liquidity by selling their stakes to foreign companies. It is expected that some FIIs will also take stake ensuring more liquidity to the industry to overcome the severe financial crunch being faced by them.

But that is only one side of the story. Capital infusion alone will not take the industry out of the red. Insurance penetration, in India   is very low except for the motor  vehicle insurance. Health and life insurance are laggards going by their penetration. Also, there are many , who drop out from the scheme midway for one reason or the other. Insurance companies should be encouraged to go out to the rural areas where there can be huge market for both life and health insurance.
Launching of attractive products at affordable price holds the key to permeating insurance culture across the country. Some of the unit linked products had ended in disaster shaving of huge savings of the people eroding their faith in the system. Some of these products were sold by the overzealous agents and advisers giving the policy holders undue hopes and expectations and hiding the real facts. Once bitten, they had become twice shy and abhorred the insurance route to social security.
Also, some of the insurance companies had embarked on huge administrative charges as high as 30-35 percent, which was kept in dark from the credulous public. They got to know these things only when the statements were sent. Whereas the internationally accepted benchmark of administrative charges vary between 1to 2 percent, Indian insurers took the insuring public for granted by overcharging to the extent of 35 percent or so.
It is important that the insurance companies should have a deep pocket to sustain their efforts since there is a stipulation of lock in period, wherein the insurance companies cannot channelize the premium for investing activities. This will mean that the business model that governs the life and health insurance should be structured in such a way that there should be liquidity for the insurance companies in a seamless manner to withstand the possibility bunching  of sudden claims. Ideally, a consortium of banks and insurance companies can be a role model for ensuring sustained liquidity. That is the case with most of the insurance companies operating in India.
Health insurance is a hotbed of mistrust among the players such as insurance companies, TPAs and the hospitals. There are cases when the hospitals are overcharging the insurance companies leading to proliferation of disputes. While the hospitals claim  the best treatment  using  state-of-the-art technology is costly, a permanent solution should be arrived at among the stakeholders to evolve standard treatment profile  for specific diseases.
There are also certain unacceptable practices among the insurance companies to disallow the  claims of the policy holders  for one reason or the other, putting the customer into great difficult. There should be a standard practice to assess the claim and disburse it at the  earliest.            

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India Economic & Investment Updates(2)

Business Economics & Services Team (BEST)
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                                                    India Economic & Investment Updates(2)


Herewith major economic & Investment updates. Those who are interested in having a detailed report, position paper, or policy framework have to contact us in the e-mails or telephone number listed  above. Please also note that this service will be free of cost till 31st December 2014 and after that we propose to make it available only to members. For membership details, please contact us through the e-mails or telephone.
 1. More states join the Uber Ban
The San Francisco based taxi aggregator, Uber, which is at the center  of controversy on account of the rape committed by one of its drivers, is facing retaliatory steps   from more states. Karnataka and Andhra Pradesh  state governments have joined the Delhi government in banning the taxi service from plying. Maharahtra government seems to be still undecided on this issue. It may be noted that these states have maximum number of women workers in the IT industry, who have to work at night. Though there are company vehicles to ply them, some on week ends or off days, travel in hired transport.

2. GST May be a Reality Soon.
The much awaited Goods and Services Tax (GST), which is designed to eliminate the cascading effect of the indirect taxes may become a reality soon. The Center and sate governments are meeting regularly to thrash out the differences. A possible breakthrough is expected very soon since the Modi administration is very keen to implement the tax regime at the earliest. But policy watchers are of the opinion that the policy implementation my become a political issue since ruling BJP objected to the implementation of the composite tax, when they were in opposition. 
3. Modi Administration Downplays CII's select leak of Industry's concern

Long back, the then Finance Minister Mr. R Venkataraman, who later became  the President of India called Indian industry as Oliver Twist: More You Give More They Want. Many in the government feel that the CII's ploy (recently they held a close door meeting to gauge the industry response to Modi Administration's economic policy and diligently leaked the highlights to the press) is nothing short of a black mail by industrialists, who want everything in a platter. For countering the blackmail, the government machinery is working overboard in collating the information about the non-perming assets created by individuals industrialists and tax evasions they commit. While CII is making a veiled attack on the government, the other apex industrial bodies  like FICCI and Assocham seem to be distancing themselves from the opinion. It is also heard that a section of  the CII remembers are dissociating themselves from the view expressed by CII.
 4, Putin Offers Helping  Hand  to Modi
Vladmir Putin, the Russian strongman, who is currently on a visit to India, seems to be wooing  the Narendra Modi administration to join hands with his country for  strengthening India's defense sector. The economic sanctions hit Russian economy to keep India on the right side has tempted the latter with direct trade in diamonds and offered technical and financial  support for the ICT and energy sectors. Modi seems to have pitched for Russian assistance, both technical and financial -for his flag ship event-Make in India.   
5. Major  Shakeout in Indian Insurance Sector Expected.
In the event of passage of the Insurance Bill by both Houses of Parliament,   a major shakeout is widely expected in the cash strapped insurance sector. Barring the state-run insurance companies and a very few private companies, almost all the players are running in loss. They may seek assistance from foreign players to make their working more operational. Newer products complying with IRDA guidelines are needed to stay in the competition. 
6. PSU Banks to raise Resources from Capital Market

According to government sources, the public sector banks in the country needs Rs 2.4 lakh crore to infuse its capital to comply with the Basel 111 capital adequacy  norms. The cabinet has already approved 10 PSU banks to go for stock sales. The overriding condition is that these banks should retain 52 percent of the government's share after the stock sales. The largest of the PSU bank -State bank of India-is expected to mobilize Rs 25,000 crore of the total approved limit of Rs 33,000 crore to meet the capital requirement.

7. Electronics Development Fund Formed
To give a boost to the electronics production in the country, the government has  given  approval to form the Electronics Development Fund. The fund to be operated by SIDBI or similar organizations will fund electronics and information technology entrepreneurship ventures. The fund will be available to both the government and private sector run companies.  

 

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