Bangkok, Oct. 2 Even as India and Thailand are well on course for conclusion of the Free Trade Agreement (FTA) talks by March next, two Union Ministers and eight Ministers from North-Eastern States (including five Chief Ministers) today made out a strong case for investments in the N-E region by potential investors from Thailand.
Citing the age-old geographical and historical links with Thailand, which date back to nearly 1,200 years, investments were sought in infrastructure and agro-processing and horticulture industries.
Echoing similar seriousness, Mr Krik-Krai Jirapet, the Thailand Minister of Commerce, who had visited Tripura, Meghalaya and Assam, along with a large delegation in June last, committed himself to a repeat visit to the remaining five States of the North East.
Launching the four-day North East India Trade and Investment Opportunities programme in Bangkok today, Mr Mani Shankar Aiyar, Union Minister for Development of North Eastern Region (DONER), said all facilities, including a single window clearance, have been created to embrace Thai investments into the region. He said some $15 billion was waiting to be spent on roads development in the North-East in the next 10 years.
Mr Jirapet, on his part, said Thai investors were keen to invest in areas such as energy, infrastructure development, food-processing, textiles and so on. Stressing on the need to fill in the missing links to facilitate large investment flow, he said “this is why I need to cover all States of the N-E region”.
Air connectivity
Highlighting the need for establishing air connectivity between N-E cities and rest of India and also Bangkok directly, Mr Aiyar said the proposed dedicated North East Airlines would become operational by July 1, 2008. “In the meanwhile, we have extended our current arrangement with Alliance Air till 2008,” he pointed out.
Allaying fears over the insurgency and terrorist movements in the N-E region, he guaranteed Thai investors that utmost importance was being given to the security situation. He clarified that most of the States were peaceful, and problems crop up only in pockets. “I don’t think this issue should stand in the way of Thai investors,” he said.
Giving the highlights of the already notified NEIIPP (North East Industrial and Investment Policy Promotion) 2007 package, which assures tax incentives and other subsidies for all investors, Mr Ashwani Kumar, Union Minister of State for Industry, said this was the best ever package by the Government for development of N-E region, and urged Thai investors to take full advantage of this package.
“We stand committed to pump in billion of dollars into the North-Eastern region, to make the people of this part of India our partners in progress, and some $250 billion is going to be invested in infrastructure development alone in the next five years in the country, bulk of which may go for such works in the N-E region.”
Thursday, October 4, 2007
Thailand investors urged to invest more in North-East region
Challenge for manufacturers
Domestic manufacturers, hit by a strong currency and cheap imports, need to sharpen competitive edges by cutting costs and upgrading technology.
For many producers in the Indian economy the rising rupee must seem like a viral fever that spares no one. Till a few months back the exporting community was hit by the rupee’s strengthening against the dollar and the Commerce Ministry, like a good doctor, was promising relief for those merchandise exporters complaining the loudest. Now it is the turn of domestic manufacturers to feel the effects of a rupee that persists at high levels with some analysts predicting t he dollar will stay below Rs 40 for a sustained period. Since imports have become cheaper, it is not only domestic manufacturers of semi-finished or finished goods such as auto components and tyres that have to fear competition from imports, but also those who produce raw materials. Soon, producers across the spectrum will begin to get restive.
They should not because extreme nervousness tempts one to reach for the help-line to the Commerce Ministry that can at best offer temporary and partial concessions. Instead, they should learn from a section of the exporting community that has turned an apparent handicap into a challenge to effect structural adjustments in the product mix, pricing strategies and markets, apart from cutting costs wherever possible. Textile exporters, for instance, have begun to shift to euro-currency markets, increase production capacities and trim the flab that a weak rupee’s price advantage allowed them to accumulate. The high-tech sector, likewise, has moved up the value chain but it has done more by shifting incremental services offshore, closer to clients and to areas whose currencies are still weak against the dollar. Domestic manufacturers do not have that comfort; instead, they are additionally burdened by rising costs on two counts, apart from the effects of a strong currency. One, the historic cost of poor infrastructure and power shortages and, two, those associated with rising wages on the heels of strong economic growth. Cheap imports following a strong rupee add an extra bitterness to the manufacturers’ cup of woes.
But here lies the challenge of sharpening competitive edges by cutting costs wherever possible. One productive way of doing so is to pressure policymakers into doing their bit for power generation, labour law reforms and land acquisitions —in effect, setting in motion the next and most crucial reforms for growth into the next decade and beyond. The second is to upgrade technology wherever possible to mitigate rising wage inflation and achieve better logistics. The third has been used most effectively by the US, Japan and the East Asian tigers, namely exporting production to low-cost centres. India has its own equivalent of a low-cost but onshore locale — the unorganised hinterland whose growth could offset some of the cost disadvantages of domestic producers.
Rupee appreciation upsets export arithmetic
Imagine a Tirupur garments exporter competing with a Chinese company for American market share. This is a classic example of an Indian exporter running economic exposure on his business. The exporter has a basic transaction exposure against the US dollar. But he also runs an equally or even more significant economic exposure against the Chinese yuan. If the yuan does not appreciate or rises less than the rupee’s gains against the dollar, the Indian exporter faces a serious threat to his share in the US market as there is an effective Chinese price cut in such a scenario. Any attempt to match the effective lower Chinese prices actually compounds the problem for the Indian exporter as his final rupee realisations are under greater pressure then.
The Chinese example has been cited here to just highlight the issue of economic exposure which Indian exporters face in today’s extremely competitive global trading environment. Indian exporters are obviously facing competition from a number of other countries also in all their main export markets. It is not surprising, therefore, to see that while exports grow double-digit in dollar terms, the growth in rupee terms is severely constrained by the complex and inter-connected risks in global merchandise trade. For the first five months in FY-08, for instance, while growth in dollar terms is 18 per cent, that in rupee terms is just 5 per cent.
At one level, these developments possibly just show the limits of export-led growth and activity in a country such as India. Indeed, with exports constituting only around 12-13 per cent of GDP, one may wonder how critical is the export-led model for India. The domestic market is huge and the level of consumption/investment demand is high enough for the country to run, even if only modest now, trade deficits.
It is quite different in the case of China where exports are a national industry (as a matter of deliberate policy) and account for more than a third of total national income and domestic consumption (though now opening up) is still largely suppressed. This structural difference between India and China is also reflected in the fact that while Chinese FX reserves are basically export surpluses, Indian FX reserves are basically capital account surpluses. At another (micro) level, the export statistics also show that in a complex and competitive global trade environment, Indian exporters are possibly not yet tuned into the need for proactive (and sometimes pre-emptive) financial risk management.
Hedging economic exposure may possibly call for more advanced financial instruments (such as currency options on the currencies of competing countries for instance) and their active use. But it is one of the quirks of the global trade/markets system that while a country such as China seeks to enjoy all the benefits of open, free consuming markets of the world (specifically the US), it picks and chooses which part of the global trade/market rules it will comply with. For instance, it heavily manages its yuan currency and also, as a corollary, does not allow internationalisation of the currency. (Most other Asian currencies except Japan also fall in this bracket. Japan has traditionally intervened heavily in its currency but the yen is one of the key international currencies also. Also to be noted is that Japan has not intervened in the yen since March 2004.)
Therefore, hedging economic exposures actively is still some way off. Indian exporters, though, can well and truly hedge transaction exposures with the available instruments in the local markets. The underlying math relating to the export sector — on export costing and pricing for instance — only seems to make that imperative.
The underlying math on exports
An analysis of the math (see Table) is necessary to throw light on the underlying economics of the export trade at the individual exporter level. If not anything else, it may at least point to how important active hedging is for Indian exporters in the current and emerging environment.
Consider an Indian company which exports only to the US market. (This is quite a realistic scenario in Tirupur, for instance, where there are a number of mid-size exporters who sell almost entirely in dollars/ to the US market).
The Economics
Equation 5 also brings out clearly how rising costs and an appreciating local currency can apply pressure on both the cost and revenue sides and render the export trade quite uneconomic.
For example, assuming per unit cost of production is Rs 100, an exchange rate of Rs 45 to the dollar and a price elasticity of 2, one can see that the unit dollar price for the exporter will be 100/45 (1-0.5) = 4.5.
Now, if production costs rise and the local currency also appreciates (as has happened in the case of Indian exports), without any change in the price elasticity (elasticities are quite sticky in the short/medium term and also unlikely to change in the case of low value added items), the exporter will be literally priced out by his competitors who have not experienced such cost side pressures/local currency appreciation. Assuming that unit costs rise to Rs 120 and the rupee appreciates to 40 against the dollar, one can see that the equilibrium dollar price for the exporter should rise to at least $6 per unit. How many mid-size Indian exporters have the pricing power to increase negotiated and agreed upon prices?
Compare the above workings with that for a Chinese exporter who has not experienced such cost side pressures and also, importantly, benefits from a relatively much more stable currency. The Chinese yuan, for instance, has been allowed to rise around 9 per cent against the dollar in the two years since July 2005 — from 8.28 to 7.51 now — but the Indian currency is up 10 per cent in just the last 7 months.
It is obvious that the Chinese exporter will have a significant price advantage which can be extremely useful in increasing market share — particularly in low value-added items.
Equation 5 tells in a very concise manner how critical it is for the exporter to protect the (initial) exchange rate based on which his export pricing has been worked out. Such protection is achieved only through active and systematic hedging.
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Knitwear exporters feel the heat of rising rupee
Tirupur (TN), Knitwear exporters have already started feeling the pinch of rupee appreciation, as they registered a 10 per cent fall in growth so far this fiscal, against the usual 15-18 per cent rise in annual growth. "There is a shortfall of 10 per cent and if the trend continues, it will be very difficult to reach Rs 10,000 crore exports, against over Rs 11,000 crore last fiscal," Tirupur Exporters Association President A Shaktivel told reporters here last night.
Rupee appreciation has had an adverse effect not only on exports, but also on employment. Nearly 7,000 people have already lost or left their jobs, on lack of new orders from July last, Shaktivel said.
Due to the weak order position, compared to other years when there are 7-8 months pending orders, there was the possibility of about 50,000 people losing jobs by March 2008, he claimed.
Moreover, exporters were also not going in for expansion, because buyers wanted garments at cheaper rates, which they were getting from Pakistan, Bangladesh and other countries, Shaktivel said.
Appealing to the Government to intervene immediately and bail out the industry and exporters, he said the Centre should bring down bank interest rates to six per cent, discourage Foreign Investments and promote only FDIs.
Nearly 76 per cent of India's exports were in dollar, of which garments contribute a major share. The government should take some steps to weaken rupee at least marginally as was done some time ago, Shaktivel said. PTI
Ban on milk powder export expires
NEW DELHI: The ban on milk powder exports has expired as the government has earlier taken a decision against extending the ban beyond September 30.
"We have not extended the ban beyond September 30, 2007. This means it has naturally been lifted," Department of Animal Husbandry and Dairy Development Joint Secretary S Rawla told PTI.
She said the government took the decision after reviewing the availability of milk powder and milk prices in the country.
When asked about apprehensions by consumer activists and industry body CII, which favoured continuance of the ban, Rawla said there are other measures under the Milk and Milk Products Order (MMPO) to check the prices if they rise again on the back of permission for exports.
She noted that there was abundant availability of milk powder in the country at the moment and there was no reason for concern.
The move should enthuse milk powder producers as the prices of the commodity has fallen significantly after the ban was imposed in February to contain inflation. The manufacturers had to cut utilisation of their capacity due to fall in prices.
India produces about 100 million tons of milk annually out of which only six per cent is used for producing milk powder. Milk powder export stood at 50,510 tonnes in 2005-06.
"Removal of ban and allowing exports freely is bound to cause shortage of milk during the upcoming long festival season starting with Dussehra, Diwali and Eid. Prices can escalate once again," consumer activist Bejon Misra said.
India now demands enhanced mkt access to Asean members
NEW DELHI: India has demanded that Asean countries should provide improved market access to 783 items including key manufactured goods like auto parts. The enhanced market access sought by India is not only in the form of tariff reductions, but also involves removal of non-tariff barriers. A number of agriculture products are also part of the list which has been submitted to Asean, government sources said.
It is felt that the move will prove a level-playing field to India which has been facing internal resistance over the Asean FTA from various sections, including Congress president Sonia Gandhi who wants the government to be cautious on the impact of liberal imports on farmers. Indian auto industry has also been raising concerns over impact of duty concessions to Asean countries under the FTA.
Sources said that while the FTA envisages elimination of duties on most goods over a period of time, imports could be still impeded by non-tariff barriers like stringent standards and conditions attached to imports. For instance, conditions like compulsory use of indigenous components could serve as a big disincentive for the automobile industry.
The Indian side has also said that negotiations on trade in services should be started this year itself and completed by the middle of 2008. Asean has been saying that negotiations on services and investment could be started only after concluding the FTA negotiations on trade in goods.
There is strong political pressure to negotiate a balanced agreement with Asean, the sources indicated. The feeling within the government and political circles is that too much market access is being given to Asean without reciprocal benefits for India. The argument in favour of strategic geo-political reasons should not overtake pure economic considerations, they feel.
Asean has been demanding that duty reduction under the FTA should be speeded up, moving faster than the initial milestones.
However, many of the Asean members have not met the stipulations laid down so far in terms of limiting the exclusion lists to 489 tariff lines and 5% of import value, the sources added. Thailand, Vietnam, the Philippines, Myanmar and Cambodia have not fulfilled this criteria so far. India has already met both stipulations in the revised offer that has been finalised.
Malaysia, Thailand and Laos have not even submitted their revised lists so far. Similar is the case with trade and tariff date which was submitted by India on August 7, 2007. These details have not been provided by Asean members, except Malaysia.
Some Asean countries have retained a large number of products in their sensitive and highly-sensitive lists, the sources said. As compared to 542 tariff lines in sensitive list by India, Indonesia has 601, Laos 611 and the Philippines 935. India has only 5 items on the highly-sensitive list as compared to 354 in the case of Vietnam and 20 in the case of Indonesia.
520 items to get tariff shield under India-EU trade pact
NEW DELHI: The commerce department is on a drive to identify 520 items that would be shielded from tariff cuts planned under the proposed India-EU bilateral trade and investment agreement. Tariffs on all other items will have to be reduced to zero in 10 years from the date of implementation of the agreement.
Speaking to ET, sources said as per the mandate of the agreement, India can protect just 520 lines from tariff cuts out of more than 5,000 product lines covered under the agreement. The import value of the protected products cannot be more than $2.6 billion. “Whatever protection is extended to our industry and agriculture has to fall within this range,” an official said.
Unlike India’s sensitive list with the Asean countries (of about 490 items), which includes as many farm products as industrial products, the sensitive list with the EU is likely to have lesser number of agricultural goods. Since EU is not perceived as a threat for many of India’s sensitive agro products like rubber, there would be more scope to protect a larger number of industrial products.
Although agriculture is a sensitive area, there are a large number of commodities which are not produced in the EU and, therefore, don’t pose a threat. “While rubber is a sensitive item and has to be protected against competition from Asean countries, there is no apparent threat from the EU countries. It might not affect the industry if it is excluded from the sensitive list. We, therefore, want the industry to work closely with the government to help identify the potential threats and opportunities,” the official said.
According to FICCI Senior Director Manab Majumdar, who has conducted workshops in some parts of the country to get inputs from various sectors, industries like automobiles, both completely-built units (CBU) and components, plastic items and equipment & machinery were most concerned about tariff cuts. “We have suggested that the sectors should be included in the sensitive list,” he said.
UNCTAD is the nodal agency helping the commerce department in finalising the list of sensitive items by holding consultations with stakeholders.
Officials from the EU and India are engaged in a meeting to take ahead the bilateral trade and investment agreement. Negotiations on the agreement envisaging liberalisation of trade in goods, investment and services, began in June this year. The two sides are hopeful of concluding talks by 2008 end following which implementation of the agreement would begin.
Exporters offload dollars in forward mkt
MUMBAI: Following the subprime crisis in the US, Indian firms are feeling the heat of a crunch in dollar-denominated credit lines, at least in the near term.
This has led to a sharp decline in dollar funds in the Indian banking system, although, concidentally, rupee liquidity is high. In this scenario, several exporters have been forced to buy dollars in the spot market, where the rupee is trading at 39.60 levels against the dollar, and then sell the dollars in the forward market.
This had led to a decline in yields on forward contracts. However, it has also resulted in the dollar posting small gains against the pound sterling and the euro in the past few days.
However, the marginal rise of the dollar against such currencies cannot be attributed to economic factors or cannot be perceived to be a longer-term phenomenon, as this is due to the surfeit of dollars being sold in the forward market.
Typically, domestic exporters receive post-shipment credit denominated in foreign currency from banks in India, which receive dollar credit from banks abroad. However, the rate of interest on credit lines for a period of one to three months have risen sharply, as compared to credit lines for a tenor exceeding three months.
A senior treasury manager said that “many banks in India have exhausted their dollar borrowing limits, following a cap fixed by the Reserve Bank of India. That is why most of them prefer lending post-shipment credit in rupee terms rather than in dollar terms, as they prefer to retain the latter within their hands, in anticipation of a dollar shortage. Hence, it is seen that funds are borrowed in dollar terms and swapped into rupees, which is then used for lending to clients.”
Standard Chartered Bank MD & corporate sales head (global markets) Hemant Mishr pointed out that “despite the measures undertaken by the US Federal Reserve and the Bank of England, the tightness in monetary conditions continues. This is exemplified by the fact that the the three-month repo rate is quoting at at 5.25%, a premium of 50 basis points ovber the Fed funds target rate.”
Treasury officials feel that even as overnight rates have been cut, rates in the money market have not fallen. This is only indicative of a dollar squeeze in the near term.
Market sources said that this is also to do with the fact that dollar interest rates are expected to dip further over the longer term. Within India, rupee flows have been abundant, due to two main reasons, one being the excessive intervention by the Reserve Bank of India, to prevent the rupee from rising too much and secondly because of government spending, in the wake of the advance tax outflows in mid-September.
Further, traders in the local forex market expect the liquidity to swell up further, given that there are some coupon payments likely to happen within this week.
With more and more traders selling the greenback on the forward market, the forward premia have dipped sharply in the local market. The premia on near-term contracts have remained below the 1% mark for a while now. In the short-term forward market, the cash-spot, cash-tom and tom-next are all trading at a discount.
Hinduja group group CFO Prabal Banerji said, “Exporters are facing a double-whammy situation. On one hand, the dollar-credits are getting increasingly restricted due to the subprime crisis and on the other hand, the rupee is showing no signs of weakening.
Selling dollars in the forward market is the only option they have at the moment, but given the extremely low premia on forward contracts, it is unlikely to make any significant difference to their profit levels.”
Monday, October 1, 2007
Myanmar violence may spike pulses prices ahead of festival
MUMBAI: The Centre’s plan to import 1.3 million tonne of pulses to meet the rising demand ahead of the festival season may be hit due to the political instability in Myanmar, an industry official said here.
The political instability in Myanmar has affected the exports of pulses from that country. India, the largest importer of Burmese pulses imports around one million tonne of pulses from Myanmar, a leading pulses importer, Morshibhai Shah said. In view of the delay in shipment, the prices of pulses have started firming up in the local market, Mr Shah added.
According to traders, 4,000 tonne of pigeon pea, 3,000 tonne of lintel and 1,000 tonne of black gram would be imported. The government has so far imported two lakh tonne of pulses. Of these, state-owned trading firm PEC will sell more than 20,000 tonne of imported pulses by October in order to increase the supply of the commodity.
The firm had in the past week invited bids from domestic traders for sale of over 1,300 tonne of imported pulses, lying at warehouses in Chennai and Mumbai.
India annually imports between 1.5 and 2 million tonne (MT) of pulses, valued at Rs 2,000-3,000 crore. With domestic production stagnant at 13-14 MT and build-up of speculative pressures, prices have hardened considerably over the last year.
The government is concerned that despite the import of about 18 lakh tonnes of pulses in FY07, the prices have not come down to the desired level. The customs duty on import of pulses has already been reduced to zero till August 1. India is facing an estimated shortfall of 3.2 MT of pulses.
Marketmen are eagerly awaiting the outcome of decision of futures trading ban on pulses like tur and urad. The government had banned futures contracts on tur and urad in January this year, followed by wheat and rice on February 28 to control inflation. The government move was prompted by complaints that futures trading in these commodities were fuelling prices.
Many studies done following the ban seem to suggest that the rise in prices was a result of supply-demand mismatches rather than futures trading. This has now prompted the FMC (Forward Markets Commission) to ask the government to revise their earlier decision. “We are going to write to the government to resume futures trading in wheat, rice, tur and urad. We are just waiting for Abhijeet Sen committee report to be submitted, said FMC chairman BC Khatua said in the past week.
India to seek removal of trade barriers to EU
New Delhi, Sep 30 (PTI) India will ask the European Union to recognise its quality testing standards and remove non- tariff trade barriers when the two sides meet here tomorrow for week-long negotiations on an agreement for elimination of import duties over the next 10 years.
A 40-member delegation from EU will hold extensive talks on a comprehensive Trade and Investment Agreement, including services, with Indian officials beginning October 1.
"Our main aim is to get a Mutual Recognition Agreement (MRA) as part of the overall pact. It is absolutely essential for exports," a senior Commerce Ministry official said.
MRAs lay down the conditions under which EU and a third country concerned will accept test reports, certificates and marks of conformity issued by the Conformity Assessment Bodies of the party to the agreement.
The official said India would also seek flexibility on the Rules of Origin -- a mechanism under which certain percentage of inputs should be locally procured for items to be covered under a bilateral trade agreement-- besides seeking easy movement of people.
"If everything goes well, we should be in a position to conclude the trade and investment agreement with the 27-nation bloc by 2008-end," he said.
India started talks with the EU, its largest trading partner, on the pact in 2006. Operationalisation of the agreement would be spread over the next 10 years and by that time duties on most of the goods traded between India and EU would be brought to zero.
"We can expect tariffs to come down to zero only by 2019, since the elimination process would be carried out in a phased manner," he said. PTI