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On This Day - 31 JULY 2008
US deficit can re-build India
In this issue:
India has an installed hydropower capacity of around 32,300 MW and plans to add another 16,500 MW by 2012. However, delays in securing environment and forest clearances have ensured that these targets will not be met.
According to India's meteorological department, though the country saw only a 2% dip in rainfall from what is normal (based on a 60-year average), the months of June and July saw shortfalls as high as 15% and 32% respectively in large parts of South and Central India. Historically, during the monsoon season, when there is a rise in hydropower generation, thermal generation units are shut for maintenance. However, with hydropower generation remaining stagnant mainly due to poor rainfall, there is no cushion to meet the growing demand. According to the Central Electricity Authority (CEA), India's apex power sector planning body, for the period between 1 April and 21 July 2008, hydropower generation in the Western, Eastern and North Eastern states fell short of targets by 8%, 14% and 20% respectively.
Though India is supposed to have the third fastest growth in the world's installed capacity for power over the next quarter of century, it will be so from a very small base. India's per capita consumption of electricity at 553 units per annum is one-third of China and one-fifth of the world average of 2,429 units.
Morgan Stanley in its Global Economic Forum has predicted that at an average price of crude oil at US$ 120 a barrel, the total budgetary deficit would be 10.4% of GDP in FY09, up from just 7.7% in FY08. If instead of US$ 120, the average price of oil were to be assumed to touch US$ 135 a barrel, the deficit estimate would rise to 11.4%. The last time the overall deficit exceeded 11% in India was in FY02. Back then, the economy was growing at an annual pace of about 5.8% YoY, against the RBI's forecast of at least 8% YoY expansion in GDP for the current fiscal. The inflation rate (WPI) was less than 2%, compared to about 12% now. Not to mention, the treatment of the deficit was done very differently than it is currently.
The then president Mr. K.R. Narayanan had, in his address to Parliament, quipped, "Disinvestment in public sector enterprises is no longer a matter of choice, but an imperative," thereby setting the government's agenda. The government of then prime minister Mr. Atal Bihari Vajpayee turned the bleak fiscal situation into an opportunity to sell state ownership of key assets to private investors, in the process raising US$ 5 bn in three years. In May 2004, the government changed and it obliged to the Left's demand of halting privatisation. In the four years that followed, asset-sale revenue dwindled to US$ 1.5 bn, even as the benchmark BSE-Sensex almost tripled in this period.
With the nuclear deal issue finally teaching the government that the 'Left may not always be right', probably it will take steps in the direction of disinvestments as well.
The recent proposal to offload 21% stake in Axis Bank held through SUUTI (Special Undertaking of UTI, which currently holds 27% stake with 6% lock-in) to raise approximately Rs 53 bn out of the Rs 90 bn budgeted for this fiscal is already a step in that direction.
The deficit amount, close to US$ 500 bn that is India's Eleventh 5-year plan (2007-11) infrastructure investment outlay, reminds us of funds wasted in developed economies that can help build, nurture and develop many developing and under-developed economies.
But where's the terrorist connection? Well, the projects have been conceptualised by Al Noor Holding Investment, the company owned by Sheikh Tarek Bin Laden, brother of Osama Bin Laden.
Global markets continue to take mixed cues from the results of financial behemoths that are still reeling with subprime write-downs and the efforts of the US government to salvage the same. The US government yesterday signed a bill to offer affordable government-backed mortgages to homeowners at risk of foreclosure. The law will also bolster government-sponsored mortgage finance giants Fannie Mae and Freddie Mac with a temporary rescue plan and stricter regulation.
Due to huge fuel subsidies, Indian consumers to a large extent have been protected by the government from the crippling effect of soaring crude prices. This obviously cannot continue for long as the oil PSUs continue to bleed and the government did hike fuel prices in the last two months. Given that India's inflation is hovering dangerously below the 12% mark, higher crude prices will only aggravate the situation further. As regards its peers, while China plans to deregulate gasoline and diesel prices with a possibility of hikes post the Olympics, Indonesia, Malaysia and Vietnam have all undertaken price hikes in the past few months.
This is the reason a host of companies, including the biggies like TCS, Infosys, Wipro and Satyam are buying out office space and hiring local people in countries like Mexico, the Philippines, Portugal, Romania and Saudi Arabia. Good to see that as outsourcing takes on new directions, old perceptions are giving way to a new line of thing in the Indian technology camp.
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