Too much hot air in nuke deal

This editorial from today's ET brings a fresh look at the nuclear deal. Though I do not agree with the author's view that the feeling in the market is that nuclear deal will reduce oil bill, I surely do agree with the author's opinion on how the nuclear power might also become costly affair like oil given limited uranium resources. But what the author misses is the bigger psychological benefit of this deal. It is step forward for India to be recognised among elite economic groups and gradually giving it more clout in world economy. Moreover, the deal, in no way is committing India to build uneconomical nuclear plants but it will keep the doors open for it to adapt new innovations in nuclear field as and when they appear in the future.

--Vj
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The partisan rancour over the Indo-US nuclear deal has helped obscure facts, allowing shibboleths and fantasies to substitute for an informed debate on a critical issue. Several myths continue to be repeated untiringly. The biggest of them draws a meretricious link between nuclear energy and soaring oil prices to justify the proposed import of high-priced, foreign fuel-dependent power reactors from overseas.

What does nuclear power have to do with the price or import requirements of any transportation fuel? Thanks to the oil price shocks in the 1970s and 1980s and the advent of new energy technologies, the share of global electricity produced from oil has shrunk from 25% in 1973 to barely 4%. The remaining oil-fired power plants - of which India has only a handful - will be phased out, or refitted to run on gas. Oil now is primarily used for transportation, while the reactor-import option is about electricity generation.

The link between nuclear power and oil is specious. In the years ahead, the world could move toward electric vehicles and even use grid power to make hydrogen for the fuel-cell vehicles of the future. In another futuristic scenario, nuclear energy may indirectly serve as a substitute to some oil use in the commercial and industrial sectors. But today, greater nuclear-generated electricity is not going to really reduce any country’s oil needs, certainly not India’s. In fact, with little overlap in the oil and nuclear global-market structures, nuclear power now competes principally against coal, natural gas and renewables.

If global oil demand is threatening to outstrip supply, so is the case with uranium. Current concerns associated with oil’s price volatility, supply security and geopolitical risks are no different than uranium’s. And if global oil reserves are finite, so are uranium resources, with proven uranium reserves likely to last barely 85 years, according to the Red Book published jointly by the OECD and IAEA.

In fact, in the past five years, the international spot price of uranium has risen faster than that of crude oil, with uranium today trading six times above its $10 a pound historical average. Oil and uranium prices are likely to stay volatile, but the long-term trend for both is surely up.

Just as cheap oil now seems fanciful, cheap nuclear power for long has been a mirage. More than half a century after the then US Atomic Energy Agency chairman Lewis Strauss claimed nuclear energy would become “too cheap to meter”, the nuclear power industry everywhere subsists on generous state subsidies, not reflected in the published costs of generation.

The current electricity-market liberalisation trends spell trouble for the global nuclear-power industry as they threaten the state support on which it survives. As a 2005 IAEA study by Ferenc Toth and Hans-Holger Rogner warns, “nuclear power’s market share might indeed follow a downward trajectory” if state subsidies abate and more cost-effective reactors are not designed.

Other international studies have shown that nuclear power, although a long-matured technology, has demonstrated the slowest rate of learning in comparison to other energy technologies, including newer sources like wind and combined-cycle gas turbines. Instead of the price declining with nuclear power’s maturation, the opposite has happened.

Power reactors also remain very capital-intensive, with high up-front capital costs, long lead times for construction and commissioning, and drawn-out amortisation periods that discourage private investors. In the US, two separate studies by the University of Chicago (2004) and MIT (2003) showed new nuclear power remaining comparatively more expensive.

That explains why the US industry has yet to receive its first domestic power reactor order in more than three decades, despite the Bush administration offering among the world’s most-attractive tax sops and other state incentives.

But in India there has been little debate on the nuclear deal’s premise - that the way to meet burgeoning energy demands is to import power reactors. While nuclear power certainly deserves a place in a diversified energy portfolio, reactor imports will be a path to external fuel dependency and exorbitant plant costs.

India ought not to confuse its electrical generation problem with transportation fuel problem. Also, India cannot correct its oil-import dependency on the Gulf region by fashioning a new dependency on a tiny nuclear-supply cartel made up of a few state-guided firms.

While oil is freely purchasable on world markets, the global nuclear reactor and fuel business is the most monopolised and politically regulated commerce in the world, with no sanctity of contract. Without having loosened its bondage to oil exporters, should India get yoked to the nuclear cartel?

With few reactors being built in the West or Russia, this cartel has aggressively sought export markets. In a bizarre spectacle, after having castigated Iran’s pursuit of civil nuclear technology as unsuited to its energy wealth, France and the US have competed to sign up reactor deals with oil-rich Arab countries.

Yet, even at the current slack rate of construction of reactors, bottlenecks are becoming a serious problem for key components. There are just a few manufacturers for many components. For example, at least nine reactor components, including giant pressure vessels and steam generators, are made only in one facility owned by Japan Steel Works. A recent study by the US-based Keystone Centre reported a six-year lead time for some parts.

The harsh truth is that reactor imports, far from cutting India’s oil imports, will increase the already wide price differential between nuclear energy and thermal power. While all the Indian power reactors built since the 1990s have priced their electricity at between 270 and 285 paise per KW hour or higher, the coal-fired Sason plant project has contracted to sell power at 119 paise per KWh.

Of the three countries lobbying to sell power reactors to India, the US has little record to show while France’s stands blemished by a two-year time overrun and $2.1 billion cost escalation in building Finland’s Olkiluoto-3 plant. The third, Russia, is struggling to complete its already-delayed twin reactors in Kundakulam. Wishful thinking ought not to cloud India’s options.

(The author, Brahma Chellaney, is professor, Centre for Policy Research)

Rising prices? Blame it on China

WASHINGTON: Tired of high gasoline prices and rising foods costs? Well, here’s a solution. Let’s shoot the speculators.

A chorus of politicians, including John McCain and Barack Obama, blames these financial slimeballs for piling into commodities markets and pushing prices to artificial and unconscionable levels.

Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don’t understand what’s happening or don’t want to acknowledge their own complicity.

Granted, raw material prices have exploded across the board. From 2002 to 2007, oil rose 177%, corn 70%, copper 360% and aluminum 95%. But that’s just the point. Did speculators really cause all those increases? If so, why did some prices go up more than others? And what about steel?

It rose 117%, and has increased further in 2008, even though it isn’t traded on commodities futures markets . A better explanation is basic supply and demand. Despite the US slowdown, the world economy has boomed. Since 2002, annual growth has averaged 4.6%, the highest sustained rate since the 1960s, says economist Michael Mussa of the Peterson Institute.

By their nature, raw materials (food, energy, minerals) sustain the broader economy. They’re not just frills. When unexpectedly high demand strains existing production, prices rise sharply as buyers scramble for scarce supplies. That’s what happened. “No one foresaw that China would grow at a 10% annual rate for over a decade. Commodity producers just didn’t invest enough,” says analyst Joel Crane of Deutsche Bank.

In industry after industry, global buying has bumped up against production limits. In 1999, surplus world oil capacity totalled 5 million barrels a day (mbd) on global consumption of 76 mbd, reckons the US Energy Information Administration.

Now, the surplus is about 2 mbd, and much of that is high-sulphur oil not prized by refiners, on consumption of 86 mbd. Or take non-ferrous metals, such as copper and aluminum. “You had a long period of underinvestment in these industries,” says economist John Mothersole of Global Insight.

For some metals, the collapse of the Soviet Union threw added production, previously destined for tanks, planes and ships, onto world markets. Prices plunged as surpluses grew. But Mothersole says “the accelerating growth in India and China eliminated the overhang.”

China now accounts for up to 80% of the world’s annual increased use of some metals. Commodity price increases vary, because markets vary. Rice isn’t zinc. No surprise. But speculators played little role in these price run-ups.

Who are these offensive souls? Well, they often don’t fit the stereotype of sleazy high rollers: Many manage pension funds or university and foundation endowments. Their trading might drive up prices if they were investing in stocks or real estate . But commodity investing is different.

Investors generally don’t buy the physical goods, whether oil or corn. Instead, they trade futures contracts, which are bets on future prices in, say, six months. For every trader betting on higher prices, another is betting on lower prices. These trades are matched.

In the stock market, all investors (buyers and sellers) can profit in a rising market, and all can lose in a falling market. In futures markets, one trader’s gain is another’s loss. Futures contracts enable commercial consumers and producers of commodities to hedge.

Airlines can lock in fuel prices by buying oil futures; farmers can lock in selling prices for their grain by selling grain futures. The markets work because numerous financial players, speculators in it for the money, can take the other side of hedgers’ trades. But the frantic trading doesn’t directly affect the physical supplies of raw materials.

In theory, high futures prices might reduce physical supplies by inspiring hoarding. But that’s not happening now. Inventories are modest. World wheat stocks, compared with consumption, are near historic lows. Recently, giant mining company Rio Tinto disclosed an average 85% price increase in iron ore for its Chinese customers.

That affirmed that physical supply and demand, not financial shenanigans, is setting prices: Iron ore isn’t traded on futures markets. The crucial question is whether these price increases will continue or ease as demand abates and investments in new capacity expand supply.

Prices for some commodities (lead, nickel) have receded. Could oil be next? Politicians promise to tighten regulation of futures markets, but futures markets aren’t the main problem. Scarcities are. Government subsidies for corn-based ethanol have increased food prices by diverting more grain into biofuels.

A third of this year’s US corn crop could go to ethanol. Restrictions on oil drilling in the United States have reduced global production and put upward pressure on prices. If politicians wish to point fingers of blame, they should start with themselves.

2 Jul, 2008, 0621 hrs IST,Robert J Samuelson
(c) 2008, The Washington Post Writers Group

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Bollywood films showing Muslims as villains is offensive: Zeba

ET: Pakistani actress Zeba Bakhtiyar, who played the title role in the film Heena, says her countrymen feel offended when Bollywood potboilers depict Muslims as villains.

"Pakistanis love to watch Bollywood films. But they feel awful and offended as all the villains portrayed in them are Muslims. I always feel that religion is one's private affair and a way of life," the actress said.

Speaking about her own experiences during the filming of "Heena" in the early 90s, Zeba said she was first apprehensive of coming to India to shoot for the movie directed by Randhir Kapoor.

"It was because I was naive and not accustomed to the functioning of the film industry. But, all my fears vanished when I came to Mumbai and met the Kapoors," the actress-turned-director said during a seminar at the third South Asian Film Festival (SAFF) here today.

Zeba had to face strong opposition in her home country for her decision to work in an Indian film. "That was a time when India-Pakistan relations were not at its best. Besides, people in Pakistan thought that since it was a Raj Kapoor film, there would be exposure and the theme would be anti-Pakistan," she recalled.

The filmmaker said there were several stories in the South Asian region that could be translated into good movies.

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As I had mentioned in one of my earlier posts, I believe movies (the mainstream, the popular fare) are more of a reflection of what society thinks and not that it is the movies which influence the thinking of a society. Hence one should not be surprised to see Muslims being shown as enemies in movies. After all since the early nineties the biggest of the villainous events in India has involved Muslims - from Kashmir, to Kargil, Bombay blasts to America's 'war on terror' and most of the never ending blasts that keep going off across the country.

Critics and secularists might argue otherwise. But the psyche of the average Indian today says that there is some correlation of violence by Muslims and their belief in Islam. This is not restricted to just the Hindus. Across religions, even the Muslims feel that they are being related so. No I'm not stating that the Islam or Muslims equate violence. For people who know me closely will vouch that I'm the most anti-Hindutva/anit-Islamisization candidate and equally anti-generalization of the “Islam=Terrorism equation”. What I'm stressing here is the change in perception of people around me, the common milieu. It is no longer a feeling restricted to the intellectuals and fundamental thoughts of the Sangh bastion. Over the past decade or so it has seeped into the common man on the streets.

This feeling of course is not affecting the daily transactions. And basic level the brotherly feeling, friendships etc. still remain. Religion still does not come in between daily business transactions. But I see the common man cringe when the politicians announce vote bank saving pro-Muslim policies. I find fewer people among the "younger generation" supporting the secular idea, the usual group where people debunk the religion based rifts.

A final argument: many will agree with the portrayal of police and politicians as corrupt and selfish in the popular media. Same is the case current with Muslims. It’s about popular perception. The reality could be that a majority of creed are actually like that or that the infamous ones are bending perceptions. It calls for better management of perception by the victims and more restraint by the popular media.

---Vj

StanChart listing in India

MUMBAI: A year after the Sepoy Mutiny, British bank Standard Chartered set up its first Indian branch in Calcutta in 1858 to cash in on the flourishing trades in rice, jute and indigo. Today, 150 years later, the bank is looking to ride the Indian stock market.

The emerging market biggie, also the foreign bank with the biggest presence in India, is looking to list itself on Indian stock exchanges. It could well be the first MNC to issue Indian Depository Receipts (IDRs)—securities that can be traded in the local stock market. The plan could partly be driven by banks in India fetching a better stock market valuation.

If its India plans go through, this would be StanChart’s third global listing after the UK and Hong Kong. India, incidentally, is the bank’s second biggest money-spinner, contributing 17% of its profits. And StanChart’s plans may also draw some of the other global firms to float IDRs—a market that is yet to take off. Initially, StanChart was thinking of listing its Indian operations after converting the branches into a subsidiary. However, this was not pursued due to the costs involved and absence of tangible regulatory benefits.

The bank has already sounded out market regulator Sebi for the IDR listing, sources told ET. The StanChart management will take a final call in the next few months. In the long run, a listing may give the bank more room to pursue M&A deals in India when the market opens up. Besides, it could also give the bank a branding edge.

According to the IDR guidelines that were revised last year, the eligibility factor requires the issuer to make profits for at least three of the five preceding years. It should also have a continuous trading record for the three preceding years. StanChart reported pre-tax profits of $4.03 billion for 2007.

The Indian operations, the biggest after Hong Kong, had posted a 71% growth in operating profits to $690 million in 2007. StanChart has the largest branch network among foreign banks with 90 offices, having invested $1.9 billion in India. Globally, the bank boasts of a $52.4-billion market cap and assets of $329 billion.

When contacted, a StanChart spokesperson from the UK said, “India is a key market for Standard Chartered. We have 150 years of history and continue to invest in our business there. In terms of specifics, we will not comment on speculation.”

Last year, while speaking at the ET Awards ceremony, StanChart group CEO Peter Sands had said, “I would love to have the cost of capital implied by the P/E ratings of the Sensex or the Shanghai Stock Exchange! If anything, the cost of capital is arguably now a disadvantage for Western multinationals.” Incidentally, Mr Sands has applied for a Person of India Origin status. However, StanChart has to think through certain local regulatory needs before pursuing IDRs. For instance, the bank announces its financial results every six months in markets like the UK, as against listed entities in India that must do so every quarter. Also, laws will have to be changed to allow capital gain tax benefits as IDRs have not been included in the definition of ‘securities’. Besides, the bank should have the flexibility to repatriate the money raised through listing. According to a senior investment banker, “Many companies are waiting for the first deal to happen. We have received enquiries from some MNCs with significant presence in the country. Though these are not the Fortune 100 companies, they are big corporates with billions of dollars of revenue.”

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It is indeed a first of firsts for the Indian stock market. The fact that StanChart is choosing to list in Indian market at a time when there is so much concern about success of IPOs, speaks volumes about the potential of Indian markets and the potential for Indian economy. This is also a thumbs up for a strong legal and regulatory system that India has managed to create in the capital markets. However, eventhough it is going into new a totally new arena, SEBI will have to ensure that this offer sails through with the least of ambiguities (both short term and long term). This is also a step towards making of Mumbai into an international financial hub.

Vj

Estate tax: Advantage India?

Will India be the next tax haven? Unlikely, but interesting

India’s economic growth and booming capital markets have generated unprecedented wealth for Indian promoters. Suddenly, India has billionaires coming out of its ears, more than Japan by one count. Yet, India’s entrepreneurs are lucky: they can pass most of their wealth to their children without too much hindrance.

Unlike many advanced market economies, India has no estate tax, or estate duty as it was known in India. Estate duty was introduced in 1953 and was abolished way back in 1985, when V P Singh was the finance minister. It is not payable on deaths occurring after March 16, 1985.

World wide, the estate tax, also sometimes called the death tax, is very much a reality. Wherever it is levied, it is usually payable on the value of the accumulated savings (by way of assets accumulated) of a deceased person. The policy intention is to bring about inter-generation equity, i.e., to ensure the children of the rich don’t have too much of an advantage in life compared to the less privileged.

On the other hand, many tax experts slam the estate tax — known as the Inheritance Tax in the UK — as a-hard-to-collect levy, which penalises savings and investment. It also encourages tax avoidance by way of creation of trusts and shell companies to which property and other assets can be transferred.

Tax rates vary widely across countries. Data collated for 2005 by PricewaterhouseCoopers for 50 countries shows Japan with a top rate of 70%. South Korea’s rate is 50% followed by the US (46%), and France and UK with 40% each. On the other hand, many countries, including India, do not levy estate tax. According to the PwC study, the 24 countries with no estate tax include China, Russia, Australia and Malaysia.

In virtually all countries with estate tax, the nominal rates usually apply only for assets above a certain exemption limit, which is usually set high enough to exclude a large chunk of taxpayers. In the US, for instance, the estate tax is payable after an exemption of $2 million.

The US law is, in fact, very complicated. As part of President Bush’s 2001 tax cuts, the basic exemption limit was raised from $1 million in 2001 to $2 million, at which level the 46% rate kicks in. In 2010, the estate tax is repealed for a year. Then after 2011, the basic exemption drops to $1 million and the tax rate rises to a rather high 55%. There are jokes about the murder rate for rich people shooting up in 2010.

The June 2006 Tax & Budget bulletin of the libertarian Cato Institute states, “The estate tax is probably the most-inefficient tax in the US. It has a high marginal rate and is very difficult for the government to administer and enforce. It has also created a large and wasteful estate planning and avoidance industry. The industry overflows with...lawyers and accountants... creating financial structures to minimise the tax burden using trusts, life insurance and private foundations.” The institute wants the US to scrap the estate tax, which accounts for just over 1% of federal tax revenues.

In the UK, the inheritance tax is payable if the taxable value of the estate is above £285,000 (2006-07 tax year) according to the British government’s website. The term ‘Estate’ is defined as “broadly speaking...everything you own at the time of your death, less what you owe,” according to the website. In addition, it might be payable on assets given away by the deceased during his/her lifetime, including property, money and investments. The tax kicks in over the threshold value.

The main argument in favour of estate tax is that it levels the playing field between the rich and the poor. The main argument against is that it discourages savings and investment, and hence capital accumulation. Obviously, a high rate of estate tax is a disincentive since a person would find it difficult to pass on his wealth to his descendants.

Further, since the tax is levied on the net value of assets, not on income, it can create a major liquidity problem for the inheritor who has to pay. This is because the tax is a lump-sum payment that may exceed revenues from a particular set of assets. Indeed, it can potentially create an incentive to liquidate the business.

In India, estate duty was abolished partly because it amounted to double taxation, since stamp duty is in any case levied on transfer of property to heirs. Stamp duty is currently between 7-9% in most states and is in some way a quasi-estate duty. The Centre wants states to bring it down to the 4%-6% range. A stamp duty is, however, only a rough proxy for estate duty since it is payable on all property sales/transfer while the latter is payable only on the death of a property owner.

In general, all taxes which are levied on assets, such as estate tax or the wealth tax tend to result in the creation of complex tax avoidance structures. Sweden’s new centre-right government has recently decided to scrap the country’s 1.5% wealth tax, which in that country is levied on all persons with wealth exceeding $2,00,000.

The tax is estimated to have led to billions of dollars of capital flight. Ingvar Kamprad, the owner of iconic furniture maker Ikea and Sweden’s richest man controls his wealth, estimated at over $20 billion, through foundations based outside Sweden.

Enormous donations to foundations with a charitable purpose, most famously by Warren Buffet and Bill Gates, may well be part of the Christian tradition but high estate tax is undoubtedly a major driver. Typically, the children of the wealthy tend to be associated with the trusts set up by mega creators of wealth like Buffet or Gates. In both Europe and the US, broadly speaking centre-left parties tend to support estate taxes while centre-right parties (such as Republicans in the US and Tories in Britain) tend to favour their abolition.

Can India attract tax tourists from the US or other high estate-tax countries? That’s right now a theoretical possibility, experts feel, given the poor physical infrastructure and lack of adequate legal framework, including the absence of complete capital account convertibility.

Also, it is far from clear what view the IRS, the US government’s famous tax arm, will take of persons relocating to India. The US claims to tax income generated worldwide by all its citizens, though in practice major companies use tax havens such as the Cayman Islands to minimise the dues payable to Uncle Sam. Still, it’s a possibility that India can exploit in the future as it gets richer.

(With inputs from Bakul Chugan)

Re has appreciated less than yuan

leave the economists behind; its the populist who decides the numbers....I was badly looking for someone to come out with some good analysis on this and who else other Aiyar would!
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9 Dec, 2007, 0230 hrs IST,Swaminathan S Anklesaria Aiyar, TNN

Hundreds of columns have been written on the exchange rate policy of the Reserve Bank of India, and its decision to let the rupee appreciate sharply this spring. However, what was earlier a debate mainly between technocrats has suddenly assumed populist, alarmist tones.

In Parliament, commerce minister Kamal Nath has said the appreciating rupee has hit labour-intensive exports such as textiles, leather goods and gems & jewellery, and that one to two million workers may have lost their jobs. Following up, industrialist and Rajya Sabha member Rahul Bajaj has written in this newspaper suggesting that 2.8 million people have lost their jobs.

The numbers are so huge that, if they were anywhere near the truth, we would have a major human tragedy on our hands. In fact, we have only tall stories and data inflation aimed at scaring people rather than informing them.

I toured Gujarat in the run-up to the state election, and talked to a wide range of people about the many issues that might determine the outcome. Not a single person mentioned worker distress in export industries as an election issue. Nor did I see this mentioned in the innumerable TV discussions of the Gujarat elections.

Now, at election time opposition parties are given to exaggerating rather than hiding distress issues. Narendra Modi was fighting principally on an economic development platform, and Congress speakers were looking desperately for flaws in his platform. Gujarat is a major centre for exporting both textiles and gems. If indeed workers were being thrown out of work by a strong rupee, this would have been a huge election issue. In fact, it was a non-issue.

I myself toured Ahmedabad and Saurashtra. I can state categorically that the garment and textile areas there were not hit by mass unemployment. Indeed, at least one textile magnate, Vinod Arora of Aarvee Denims, was positively gung-ho about the future of his industry.

I did not visit the diamond-cutting areas around Surat. But my Economic Times colleagues went there, and found no unemployment arising out of a strong rupee. They found signs of declining foreign orders, but this had not translated into fears of job losses among diamond cutters. The electoral impact was negligible. In which case the economic impact must be close to zero too. Proponents of a weak rupee are altogether more agitated than the people on whose behalf they claim to be agitating.

Now, ET correspondents have reported job losses running into thousands in Tiruppur. Clearly, there is some distress in some areas. But it is not an all-India calamity. There is a world of difference between losing a few thousand jobs and two million. Some job losses are inevitable, indeed desirable, in a market economy, and constitute transitional pains, not human disaster. Those who claim that a strong rupee is costing millions of jobs are talking through their hats. We need to shout this from the rooftops, since many media folk are falling for false propaganda on this score.

Indeed, the notion that modest changes in the exchange rate can produce such huge swings in employment is obviously false. If a modest rise in the rupee can kill two million jobs, a corresponding fall in the rupee should create a similar number of jobs. Alas, that did not happen when India had big currency declines in the past. Nor will it happen if the rupee now falls by 13%.

Export growth in April-September was 26.9% in dollar terms, and provisional data suggest 35.6% growth in October. Even allowing for rupee appreciation of 13%, this constitutes solid export growth. Exporters may be under somewhat more pressure than before, but are not throwing millions out of work.

What exchange rate policy should we have? I have written much less on this topic than many other observers, because I do not have strong views on the subject. I see some substance in the position of those who say the RBI should focus only or mainly on inflation control, letting the exchange rate find its own level. I also see some substance in those who think the RBI should focus on macroeconomic management over and above inflation. Finally, I see some substance in the argument of those who want the RBI to focus on the exchange rate above all, to promote exports and employment.

Most people measure the rupee’s strength against the US dollar. The RBI is more sophisticated: since 1973 it has aimed to keep constant the real effective exchange rate, to protect exporters after accounting for changes in the nominal exchange rate and inflation. Many technocrats see this as a successful policy worth maintaining. Others point to China as a superior example of a country that has refused to kow-tow to foreign pressure to appreciate.

However, the notion that the rupee has appreciated much faster than its rivals does not stand up to detailed examination. Certainly the 13% appreciation of the rupee since early 2007 is steeper than experienced by most rival currencies. But if we start our comparison in July 2005, when China first began to let its currency rise, we find that the rupee has actually risen less than the yuan!

See the accompanying table. It shows that, compared with July 2005, the rupee has risen only 9.4% against the dollar. Much stronger rises have been registered by China (10.9%), South Korea (11.1%), Malaysia (12.6%), Thailand (20.2% and Brazil (25.4%). In no way can the rupee’s appreciation be called steep or extraordinary.

So, what’s the fuss about? The answer lies in the fact that the rupee actually weakened against the dollar from mid-2005 to mid-2006, at a time when other Asian currencies were strengthening. This has now been reversed in 2007, somewhat sharply. Had the RBI allowed rupee appreciation from 2005 onward in line with China, the change in 2007 would not have been so sudden.

Seen in this light, the main failing of the RBI is not that it has made the rupee too strong, but that it should have started the process two years earlier. Had it done so, the change in the rupee’s value would have been more gradual and corporations would have adjusted much more smoothly.

The RBI’s second failing is that inflation in India has been higher than in most rival countries. This erodes our competitive edge. Whether rising productivity offsets this remains to be seen.

------------------ more to add onto Aiyar is that rising rupee also helps in controlling import prices. Given that many Indian textile manufacturers are expanding, this is the time to import those expensive machines. And yes go on the M & A rampage. Leave alone capital expenditure, think about the good effect it has in acting against the rising crude oil prices. All I want to say is that 'every coin has two sides'! -Vj

As oil nears $100, look out below

A discussion on the most intriguing topic of today:



Oil prices are soaring. Having jumped 40% since August, crude prices hit another historic high on November 6, rising to $96.70 a barrel. The factors sparking the $2.72 rally this time: bad weather in the North Sea that could force production cuts, the dollar’s continued fall, more violence in the Middle East, and fears that US crude supplies are low. But is there a sharp fall just ahead? Analysts say that the oil market looks overheated, and a number of factors could puncture the price bubble.

Most important, speculators have played a key role in driving up crude prices this year, and if the trend reverses they’ll get out fast. Certainly, global demand remains strong for now. But a number of factors—technical indicators, an economic slowdown, lower demand— could prompt investors to exit en masse. “Oil prices are in uncharted territory,” says Peter Fusaro, co-founder of the Energy Hedge Fund Centre, which tracks commodities hedge funds. “My worry is that if the market tanks, everyone will want out at the same time.

The market would collapse, and who knows what the bottom is.” Much Trading Remains Opaque Speculators have played a growing role in the oil market in recent years. There are 595 hedge funds that are engaged in at least some energy trading now, more than triple the 180 funds involved just three years ago. Fusaro estimates the assets involved in such trading total more than $200 billion, up more than 60% from the beginning of the year. It’s tough to get a firm handle on the speculation.

A large portion of trading takes place in the unregulated, over-thecounter market. Still, some of the trading in crude oil takes place on the New York Mercantile Exchange (NYMEX), and there the market is approaching a record in terms of the number of crude oil contracts that predict a price rise. Traders have committed to 135,000 contracts— each representing 1,000 barrels of crude—betting that prices will continue to rise. That’s just shy of the record 155,000 contracts reached this summer. Some analysts say that if the number of contracts rises sharply, oil prices could fall. “The exit signal for investors could be breaking through the 150,000 or 160,000 contract barrier,” says Joel Fingerman, president of OilAnalytics.net, an energy consulting firm. “At that point investors could feel they’re using all their bullets.”

For Now, It’s Full Steam Ahead In the meantime, however, investment continues to flood the crude oil market, as well as commodities in general. “The mentality now is very bullish,” says Fingerman. “As long as money keeps flowing in, people will keep buying [oil] as though it’s going to go to the moon.” The optimism has helped the stocks of the oil majors. ConocoPhillips is up nearly 40% over the past year. ExxonMobil, Chevron, British Petroleum and Royal Dutch Shell have posted similar if somewhat smaller gains. Still, some analysts say the psychological impact of $100 oil could mark the beginning of a slip in prices. “The professionals will get out of the market at $98.50 or $98.99,” says Peter Beutel, president of the energy risk management firm Cameron Hanover in New Canaan, Conn. “They’re not going to wait for $100 to materialise.” But is there anything special about the $100 mark? Some experts think not. “The barrier was supposedly $70, $80, then $90, and we’re past that. Why would $100 suddenly cause a reversal?” says Stephen Schork, an energy consultant in Villanova, Pa., and editor of the Schork Report, a daily energy newsletter. “$100 is not the death knell to the bull market.”

A Correction Is Inevitable Beutel says that regardless of the exit signal for investors, the oil market is due for a correction. “Historically speaking, we see that every time there is a sustained vertical [price] rise, there is a 20% correction,” says Beutel, adding that the serious threat of a recession could take 40% off oil prices. “It’s a beautiful thing that people forget: The market moves more quickly on the downside than it does on the upside.” It’s also possible that ballooning oil prices will begin to fall when demand responds to price signals, as it happened in the 1980s. “The uptick in crude hasn’t caused the same drag on the economy as it did 28 years ago,” says Ray Carbone, owner of the trading firm Paramount Options. “But once we’re past all-time highs in oil prices, things could change.”

Courtesy: BusinessWeek