Infosys to Buy Lodestone Holding

Infosys Ltd. Monday said it will buy privately held Swiss business consulting company Lodestone Holding AG for an enterprise value of 330 million Swiss francs ($350 million), in the Indian outsourcing service provider's largest acquisition so far.

How Long Will Indian Equities Stay Hot? WSJ

Despite many reasons for foreign investors to avoid India, they're pouring money in. What gives?

Overseas institutional investors bought $3 billion of Indian equities in the last two months. That compares with an outflow of $358 million last year.

India Scraps Taxes on Imported Fuels to Help Power Firms (WSJ)

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India Friday proposed to remove import taxes on coal and liquefied natural gas and allow electricity producers to raise cheaper funds overseas as it sought to give a much-needed breather to the power sector reeling under losses due to lower tariffs, higher fuel expenses and costly debt.

India Proposes New Tax on Foreign Mergers (WSJ)

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The Indian government proposed legislation Friday that would allow it to retroactively tax overseas mergers in which an underlying Indian asset is transferred, a move that would override the effect of a recent Supreme Court decision in favor of British telecommunications giant Vodafone Group PLC and is likely to sit very badly with foreign companies.

Markets Give Budget a Thumbs Down (WSJ)

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Finance Minister Pranab Mukherjee’s fourth successive federal budget Friday got a big “thumbs down” from India’s investors.

The Bombay Stock Exchange’s benchmark Sensitive Index reversed an early 1.1% gain and fell to a day’s low of 17,426.58, down 1.4%, after the budget proposed a slew tax hikes and failed to show any credible reform or fiscal consolidation plan, market participants said.

StanChart Bullish on India, China:: WSJ

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Standard Chartered PLC remains bullish on the major Asian economies of India and China, encouraged by the policy outlook for the two countries this year, the bank’s Asia chief executive said.

The U.K.-based lender, which focuses almost exclusively on Asia and emerging economies, also sees European rivals retreating from those markets as they are beset with challenges at home, Standard Chartered Asia Chief Executive Jaspal Bindra said in an interview on the sidelines of the World Economic Forum.

In India last year, Standard Chartered confronted a range of challenges including slowing growth, rising interest rates and a depreciating rupee. Revenue from the bank’s India unit fell by 12% in the first half of 2011 and by the “mid-teens” in the third quarter, Group Finance Director Richard Meddings said earlier.

Mr. Bindra blamed higher interest rates. “Interest rates went up almost 400 basis points in a short period, and it is very difficult, if you do wholesale business with the best clients in the country, to pass on a 400 basis point increase at any one time.”

But the central bank’s surprise move to loosen monetary policy this week has sent a “clear signal” that there will be no further rate hikes and the government is shifting its focus to promoting growth, Mr. Bindra said.

The Reserve Bank of India Tuesday held its key lending rate steady for a second straight policy meeting but cut the minimum cash reserve requirement by 0.50 percentage point to ease liquidity.

“The government has for a long time shown a huge preference to manage inflation through monetary policy,” he said. But following the RBI cut, “I think we will see a more balanced approach.”

Mr. Bindra also said that the recent “normalization” of the rupee exchange rate — it is up 6% against the dollar so far this year after declining 15.1% in 2011 — will encourage renewed foreign investment.

In China, Mr. Bindra believes authorities will be successful in guiding the economy to a “soft landing” ahead of a leadership transition at the end of the year.

“The priority for all of 2012 and beyond is going to be ‘how do we keep things stable,’ as they have this transition of power at the top,” he said, adding that not just the top political leadership, but also the leaders of major financial institutions and regulators are all due to be reshuffled. “It is quite a massive-scale change of power.”

As European banks regroup and retreat from Asia, Standard Chartered sees an opening. The trend is especially pronounced in industries including shipping and commodities and in markets like Indonesia and India where dollar liquidity is scarce, he said.

“It gives us an opportunity to scale up market share, and second, it gives us a little bit of pricing advantage.”

The 1991 Speech Manmohan Singh Should Make Today (WSJ)

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On July 24, 1991, then-Finance Minister Manmohan Singh gave what must be one of the most important speeches ever given in India’s Parliament.

In it, he sets out a clear vision for what needs to be done to spur the Indian economy, which was in the midst of a deep financial crisis. Mr. Singh’s words are forthright, honest, humane, occasionally humorous, and consistent in their vision of an India where the government is an enabling force for the improvement of the lot of all Indians, not just those with the political connections or the wealth to amass greater riches.

Since then, of course, India has embarked on a momentous journey that has seen many aspects of life improve. Just a year or two ago India was, in many ways, the envy of the world for its great promise and the genuine belief among many here and abroad that the nation’s seemingly endless wellspring of potential was being rapidly and effectively tapped. Yet today, under Mr. Singh’s leadership, India finds itself full of pessimism, with a deteriorating economy, ineffective governance and increasing concern that most Indians haven’t benefited from the last two decades of growth.

Doubts are rising about whether India’s best years already are behind it. With hindsight, the years 2005-2009 increasingly appear not as the start of a meaningful change in India’s overall trajectory but as a few golden years where economic growth was well above what now looks like will be a much-diminished long-term average.

It is worth looking, then, at how Mr. Singh described the country’s predicament in 1991 and what he proposed as the solutions needed to rescue India’s prospects. What is most striking is that his identification of the problems and his prescriptions for them remain as relevant as they were in 1991. That, in itself, raises the question of how much has really been done.

We have chosen verbatim excerpts from the 1991 speech that seem especially apt. We have made a few updates – in italics – to show how Mr. Singh today might rekindle some of the forthrightness he mustered then but has since lost. We find the parallels in his speech to what is happening in India today uncanny. Let us know what you think in the Comments section:

Sir,

I rise to present the state of the nation for 2011-2012.

International confidence in our economy was strong until November 2010 when our Party was in office. However, due to the combined impact of political instability witnessed thereafter, the accentuation of fiscal imbalances and the eurozone crisis, there was a great weakening of international confidence.

Due to the combination of unfavourable internal and external factors, the inflationary pressures on the price level have increased very substantially since mid-2009. The people of India have to face double digit inflation which hurts most the poorer sections of our society. In sum, the crisis in the economy is both acute and deep. We have not experienced anything similar in the history of 21st-century India.

The origins of the problem are directly traceable to large and persistent macro-economic imbalances and the low productivity of investment, in particular the poor rates of return on past investments. There has been an unsustainable increase in Government expenditure. Budgetary subsidies, with questionable social and economic impact, have been allowed to grow to an alarming extent.

The increasing difference between the income and expenditure of the Government has led to a widening of the gap between the income and expenditure of the economy as a whole. This is reflected in growing current account deficits in the balance of payments. The crisis of the fiscal system is a cause for serious concern.  Without decisive action now, the situation will move beyond the possibility of corrective action.

There is no time to lose. Neither the Government nor the economy can live beyond its means year after year. The room for maneuver, to live on borrowed money or time, does not exist any more. Any further postponement of macroeconomic adjustment, long overdue, would mean that the balance of payments situation, now exceedingly difficult, would become unmanageable and inflation, already high, would exceed limits of tolerance.

For improving the management of the economy, the starting point, and indeed the centre-piece of our strategy, should be a credible fiscal adjustment and macro-economic stabilisation during the current financial year, to be followed by continued fiscal consolidation thereafter.

If we do not introduce the needed correctives, the existing situation can only retard growth, induce recession and fuel inflation, which would hurt the economy further and impose a far greater burden on the poor.

The thrust of the reform process would be to increase the efficiency and international competitiveness of industrial production, to utilise for this purpose foreign investment and foreign technology to a much greater degree than we have done in the past, to increase the productivity of investment, to ensure that India’s financial sector is rapidly modernised, and to improve the performance of the public sector, so that the key sectors of our economy are enabled to attain an adequate technological and competitive edge in a fast changing global economy.

As we enter the second decade of the 21^st century, India stands at the cross-roads. The decisions we take and do not take, at this juncture, will determine the shape of things to come for quite some time. It should come as no surprise, therefore, that an intense debate rages throughout the country as to the path we should adopt. In a democratic society it could not be otherwise.

A vast number of people in our country live on the edges of a subsistence economy. We need credible programmes of direct government intervention focussing on the needs of these people. We have the responsibility to provide them with quality social services such as education, health, safe drinking water and roads.

The challenge that we are facing is without precedent. We have achieved considerable success in the field of development, modernization and greater social equity. However, we are yet far from realising our full potential in all these areas. We have to accomplish the unfinished task, while remaining steadfast in our allegiance to the values of a democratic system.

In highlighting the significance of reform, my purpose is not to give a fillip to mindless and heartless consumerism we have borrowed from the affluent societies of the West. My objection to the consumerist phenomenon is two-fold. First, we cannot afford it. In a society where we lack drinking water, education, health, shelter and other basic necessities, it would be tragic if our productive resources were to be devoted largely to the satisfaction of the needs of a small minority.

The country’s needs for water, for drinking and for irrigation, rural roads, good urban infrastructure, and massive investments in primary education and basic health services for the poor are so great as to effectively preclude encouragement to consumerist behaviour imitative of advanced industrial societies.

Few would disagree that I am one of the most harassed Prime Ministers in recent times. To perform the onerous task before me, I need support from the Press.

I have now nearly come to the end of my labour. This country has honoured me by appointing me to some of the most important public offices of our sovereign Republic. This is a debt which I can never be able to fully repay. The best I can do is to pledge myself to serve our country with utmost sincerity and dedication.

A Prime Minister has to be hard headed. This I shall endeavour to be. I shall be firm when it comes to defending the interests of this nation. But I promise that in dealing with the people of India I shall be soft hearted.

The grave economic crisis now facing our country requires determined action on the part of Government. We are fully prepared for that role. Our party will provide an effective Government to our country. Our people are our masters. We see the role of our Government as one of empowering our people to realize their full potential.

I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come.” I suggest that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.

Is the Economy Headed Back to 1991? WSJ

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Is Manmohan Singh, who brought India out of a financial tailspin in 1991, now leading the country back into another crisis?

Twenty years ago, the current Prime Minister and then-finance minister, explained the urgency of implementing economic reforms in a historic budget speech.

At the time, India was nearly bankrupt and on the verge of defaulting on its sovereign debt. The fault lay largely with India’s high current account deficit, which can increase levels of foreign debt, and a steep fiscal deficit, or the gap between the government’s expenditure and its earnings, Mr. Singh explained. Meanwhile, the country’s foreign exchange reserves were not enough to pay its debt.

Reforms proposed by Mr. Singh and the government in 1991 got India out of that mess and eventually on to a path of 8%-plus growth in gross domestic product.

But in recent months, India’s economic picture is again looking grim.

Growth has slowed sharply, down from the government’s original target of 9% to around 6.5% for the year ending March 31, 2012, according to some estimates. The reform process has all but stalled. India’s current and fiscal deficit are both high, and a recent government bill to provide food security to India’s masses, will likely worsen India’s financial burden.

“It is fiscally irresponsible to propose undertaking spending without explaining where the funds will come from,” Gita Gopinath, an economics professor at Harvard University, told Economic Times newspaper.

Some say things have changed sufficiently that today’s troubles don’t amount to an impending catastrophe.

“We’re not on the verge of a crisis,” says Sachchidanand Shukla, chief economist at Enam Securities Pvt in Mumbai. This time around, India has enough foreign exchange reserves to meet its debt obligations, he says.

But “in terms of the policy-making, we’re basically entering a regressive phase,” says Mr. Shukla. “Sentiment-wise there’s been a huge downgrade” for India’s economy, he says.

Here’s a look at how key pieces of current economic data compare to where India stood in 1991:

Current Account Deficit (The difference between a nation’s total exports of goods, services and transfers, and its total imports of them)

THEN: The current account deficit was estimated to be “more than 2.5% of gross domestic product in 1990-91,” said Mr. Singh in his speech. He described India’s balance of payments situation as “exceedingly difficult.”

NOW: For years after the 1991 crises, the Indian government contained the current account deficit to less than 2% of GDP. But in recent years, the deficit has ballooned to 1991-like levels, thanks partly to higher imports and more recently lower exports. For the year through March 2012, economists expect the deficit to come at around 3% of GDP.



Fiscal Deficit (The difference between the government’s total revenue and its expenditure)

THEN: The fiscal deficit is “estimated at more than 8% of GDP in 1990-91,” said Mr. Singh in his speech, calling it “a cause for serious concern.” He said “It should be our objective to progressively reduce the fiscal deficit of the Central Government…and to reduce the current account deficit in the balance of payments.”

NOW: The fiscal deficit for the year-ended March 2012 is expected to come in at 5.5% or 6% of GDP, much higher than the government’s targeted 4.6%. The food subsidy bill will add to this burden, say economists, unless the government cuts back on its expenditure proportionately.

Inflation

THEN: India’s wholesale price index, a leading benchmark for inflation, increased 12.1% in the year ended March 31, 1991. Mr. Singh had called it a “serious problem”. He said: “Inflation hurts everybody, more so the poorer segments of our population.”

NOW: Since early last year, the Reserve Bank of India has been battling 9% to 10% inflation, by increasing benchmark interest rates 13 times. The central bank, and economists, expect that for the year ending March 31, inflation will be around 7%.

Foreign Exchange Reserves

THEN: In early 1991, India’s foreign exchange reserves, comprising foreign currency, bonds and other assets, was around $1.2 billion. “The current level of foreign exchange reserves…would suffice to finance imports for a mere fortnight,” said Mr. Singh.

NOW: After the opening up of the economy, foreign direct investment and foreign institutional investment into India’s capital markets helped boost India’s foreign exchange reserves. They now stand at $307 billion, according to the Reserve Bank. Economists say this can cover eight to nine months of India’s imports.

External Debt

THEN: External debt was 29% of GDP in March 1991, according to a recent research from Morgan Stanley. “Persistent deficits, which were inevitably financed by borrowings from abroad, have led to a continuous increase in external debt,” said Mr. Singh in his 1991 speech.

NOW: According to Morgan Stanley data, external debt was just 18% of GDP as of June 2011.

Over the years, the composition of borrowing has changed. Mr. Shukla, the economist at Enam Securities, says that while in the nineties it was mostly government borrowing, in recent years Indian companies have been the major borrowers of foreign money, to grow their businesses or fund their short-term cash needs.

Indian Rupee

THEN: In a bid to improve India’s financial situation and attract a loan from the International Monetary Fund, Mr. Singh had instructed the central bank to devalue the rupee. This was done in two steps – first by 9.5% against the U.S. dollar on July 1, 1991, and by another 11% two days later.

NOW: In recent months, given India’s high current account deficit and muted foreign investment, market forces have pushed the Indian rupee sharply lower against the U.S. dollar. It’s down nearly 18% since the beginning of the year to trade at around 52.70 rupees for one U.S. dollar.

To resuscitate India’s economy in 1991, Mr. Singh had said: “We must act fast and act boldly.”

The same holds true today, to bring India back to a 9% growth track.