RBI can't stem the rupee's fall, but a purposeful government can help

Since September, the rupee is down more than 17% against the dollar and many people are convinced that the Reserve Bank of India (RBI) should intervene strongly to stop the slide. But there is not much it can do. Textbooks say that countries with relatively high interest rates attract money from low-rate countries. But after raising rates 13 times in a row, further hikes might not attract too many dollars. To intervene directly, selling dollars and mopping up rupees is very risky, as Thailand discovered when the baht was under attack in 1997. In any case, forex reserves are down around $14 billion since September, and the RBI will be wary of throwing dollars around. So there's little that the RBI can do. And it might not be necessary to do much. The rupee seems to have dropped off a cliff when measured against the dollar. But that's not the right comparison, because the dollar has strengthened against almost all global currencies as money looks for safe havens. When measured against the six most traded currencies, the rupee's real effective exchange rate (REER) was still 1.5% higher than it was in 2009/10. Measured against a bigger basket of 36 currencies, the REER has depreciated in September and October, but the fall is nothing as dramatic as the movement against the dollar. So, the rupee was due for a correction and that has happened. But if the RBI doesn't have the room to intervene, what will restore some strength to the rupee? Any change in the perception of paralysed government will be a big help. Investors know that they need to take risks when they move money around the world, but they like to have some idea of the magnitude and nature of the troubles ahead. Right now, India looks like a place that could hold many nasty surprises, with little clarity on existing policies and no guarantee of progressive policy-making in the near future. Now, it would take a very brave soul, with a penchant for making wild leaps of faith, to make big bets in such an environment. There are other things the government could do: come out with inflation-indexed bonds to offset some gold imports, driven up to hedge against inflation, and decontrol diesel, to cut consumption and imports.

RBI has paused rate hike at the right time

The Reserve Bank of India (RBI) has paused its interest rate activism. After 13 hikes in a row, it has held rates unchanged in its policy announced on Friday. This is welcome, because now worries about a slowdown in growth have started looming above the pain of high inflation. Though the RBI has not made any commitment to cut rates soon, we expect that the pause in hikes is a precursor to future rate cuts. After all, interest rates have gone up continuously since March 2010 when the first worries of stimulus-fired inflation surfaced. At 9.1%, inflation today is still above the 9% worry-mark , but it has eased from the 9.7% level a month earlier. Inflation in India has many drivers, some of which can't be licked by monetary tightening alone. Food inflation, which hurts people most, is largely structural, driven by high wastage, low productivity and the lack of infrastructure for storage and transport to markets. The sharp fall of the rupee since September is another worry. India imports most of its crude and a weaker rupee translates into higher fuel prices, which in turn, set fire to inflation. However, the RBI seems to have succeeded in talking up the rupee. On Thursday, it put curbs in the way of speculation in the rupee by blocking naked hedges. It has also told banks and financial intermediaries to make transactions only for delivery trades. So, liquidity will return and speculative arbitrage will drop. On Friday, the rupee responded, rising against the dollar. If the rupee strengthens gradually from now on, the RBI would have slain one major contributor to inflation without having to dip into its reserves. Yet, despite the RBI's savvy, there is only so much it can do. The rest of the work to curb inflation and strengthen the economy has to be done by government . To curb gold imports as a hedge against inflation, it must issue inflationindexed bonds to wean people off the gold-buying habit. Creating active farm markets by building roads and storage, and scrapping the APMC Act will cut farm waste and shorten the supply chain from farm to fork. These are not rocket-science reforms, but they'll tell the world that the government means business and restore confidence in India's growth story.

Design is a much-maligned word: Aricent Group CEO Sudip Nandy

Sudip Nandy is a well-known face in infotech circles. He spent 25 years in Wipro and as its chief strategy officer, a position Azim Premji's son Rishad Premji now holds, gave shape to Wipro's 'string of pearls' strategy helping it seal nine acquisitions, mergers and joint ventures. He also led the technology, communication and media business for Wipro, one of its more prominent businesses lines with over $1 billion in revenue. Now as CEO of the Aricent Group, an entity focused on technology for the telecom segment, Nandy is trying to build a business that goes beyond telecom. For instance, the company is doing work for a large manufacturer of washing machines in China that wants to become a world dominant player. The manufacturer wants to build software that will make the washing machines more intelligent and simplify the process to a twobutton operation. Normally, the manufacturer would hire a consulting and design firm to deliver the spec and then give the implementation contract to another firm or do it in-house. Aricent is now positioning itself as a firm that can handle this entire chain, market research, design and implementation, says Nandy. It is able to do this through the capabilities acquired through Frog Design, now known as Frog, a German design firm. Kohlberg Kravis Roberts & Co (KKR), the PE firm that owns the largest stake in both Aricent and Frog, combined the two to form the Aricent Group. Aricent has retained the Frog brand name because of the recall. "Design is a much-maligned word," he says. Frog employs behavioural experts, ethnographers and product design experts, and is more than just website design although it does user interface design as part of its services. The Frog team has about 700 employees, and in all, the Aricent Group employs nearly 11,000 people. "We are not reinventing ourselves, but representing ourselves. A lot of changes have been made in the way we sell in the last one year." Nandy joined Aricent as CEO in October 2008. Prior to his joining and KKR acquiring stake in the firm in 2006, it was promoted by Flextronics and known as Flextronics Software Systems. The company was a listed entity called Hughes Software Systems before Flextronics acquired it, making it one of the early software firms to set up shop in the country. Nandy says about half

the company's revenues come from work that increases revenues for customers by opening up new markets. "We may seem like a one-industry company, but we don't see ourselves like that," he says. Aricent is also doing work for one of the top four banks globally on designing applications for the Android and iPad platforms and for a large chipmaker on creating a home equipment management device. But with new kind of projects, there are also new risks and challenges. One of its customers did not want Aricent to do similar work for any other company. Another wanted Aricent to assume the intellectual property (IP) risk, although the IP was owned by the customer and Aricent was not getting any royalty from the sales. "It's a dialogue we have not had in the classical IT services context," says Nandy. According to him, in the case of the first client, Aricent was able to discuss and narrow the list to a few companies that were the competition and also limit the time for that it was restrained from working with them. In case of the second client, since most of the IP was developed in conjunction with it, it was able to convince them that it could not take on the IP risk. Patent infringement suits are not just a contentious issue between the likes of Apple and Samsung but, increasingly, also an issue between telecom operators as software and technology move from the back office to the frontend. "Software and technology were always a strategic differentiator at the back office for functions such as finance and supply chain, but now they are moving to the front end," Nandy says. Since Aricent is just starting on this journey, design and innovation currently account for only about a quarter of its revenues, he says. Nandy says privately-held Aricent is not yet a $1-billion company but of a substantial size. Its largest investor, KKR, typically stays invested in its portfolio for 7-8 years. "In India, many private equity firms behave like venture capitalists and want a financial return in a few years. This is not the case with KKR." KKR invested in Aricent in 2006. Other than KKR, Sequoia, US, The Family Office, Delta Partners and The Canadian Pension Plan Investment Boardare are also investors in Aricent. In the telecom equipment vendor market, Aricent's Indian competitors are Wipro and, at times, Tata Consultancy Services and HCL Technologies. In the work it does for telecom operators, its competitors are Wipro, Tech Mahindra, Accenture and CapGemini.

India should not fritter away PSU profits from commodity boom
Slowing tax revenue and rising government spending on food security and universal health threaten to send the fiscal deficit skyrocketing next year. To check this, many experts want to raid the surpluses of public sector undertakings (PSUs). These surpluses have ballooned thanks to a global commodity boom hugely benefiting mineralproducing PSUs, such as ONGC, Coal India, NMDC and Oil India. These profits are unearned windfalls. They should not be frittered away in current government spending. Part of the windfall should be conserved for future generations, in the manner than Norway, Chile, Kuwait and Saudi Arabia have done through sovereign wealth funds. T V Mohandas Pai and Gautam Seshadri wrote an article in this space calling for a massive special dividend to be paid by PSUs (Why Borrow? Reward Yourself, ET, Dec 16). They said that the four big mineral producers plus Bhel could easily pay special dividends totalling Rs 53,000 crore. This would not jeopardise their future investment plans. Others have suggested two variations on this theme. One is a buyback of shares by PSUs. The second is for PSUs to use their surpluses to buy out minor stakes of the government in other PSUs. Both schemes would transfer PSU surpluses to the Budget. However, raiding surpluses is just one more way of selling family silver to meet current budgetary expenses. This is not a way of balancing income and spending. Such one-off sales can be justified in difficult times, yet need to be recognised as ways of temporarily funding the deficit rather than reducing the deficit. Treating asset sales as revenue is an accounting trick to persuade unwary observers of the soundness of a sinking budgetary ship. The public sector is no paragon of efficiency in India. The overwhelming bulk of state government PSUs are sick or closed. Central PSUs have done far better, but they too typically withered when faced with private sector competition. The Cement Corporation cannot compete with private cement companies, Hindustan Paper Corporation cannot compete with private paper companies, BSNL and MTNL cannot compete with private telecom players. How then have some PSUs generated massive profits? Answer: the surpluses are, overwhelmingly, windfalls from a global commodity boom. The price

of oil, for instance, has risen from $18 a barrel in the late 1990s to over $100 a barrel today. Coal and iron ore prices have risen almost as fast. Before 1991, price controls kept domestic mineral prices well below global rates, and public sector profits were modest. But the freeing of price controls, plus the global boom, has produced a windfall. The recent depreciation of the rupee by 20% will boost the windfall further. The big four mineral-extracting PSUs have cash in hand of Rs 1,15,000 crore. This does not reflect any great efficiency on their part.

India should not fritter away PSU profits from commodity boom
Slowing tax revenue and rising government spending on food security and universal health threaten to send the fiscal deficit skyrocketing next year. To check this, many experts want to raid the surpluses of public sector undertakings (PSUs). These surpluses have ballooned thanks to a global commodity boom hugely benefiting mineralproducing PSUs, such as ONGC, Coal India, NMDC and Oil India. These profits are unearned windfalls. They should not be frittered away in current government spending. Part of the windfall should be conserved for future generations, in the manner than Norway, Chile, Kuwait and Saudi Arabia have done through sovereign wealth funds. T V Mohandas Pai and Gautam Seshadri wrote an article in this space calling for a massive special dividend to be paid by PSUs (Why Borrow? Reward Yourself, ET, Dec 16). They said that the four big mineral producers plus Bhel could easily pay special dividends totalling Rs 53,000 crore. This would not jeopardise their future investment plans. Others have suggested two variations on this theme. One is a buyback of shares by PSUs. The second is for PSUs to use their surpluses to buy out minor stakes of the government in other PSUs. Both schemes would transfer PSU surpluses to the Budget. However, raiding surpluses is just one more way of selling family silver to meet current budgetary expenses. This is not a way of balancing income and spending. Such one-off sales can be justified in difficult times, yet need to be recognised as ways of temporarily funding the deficit rather than reducing the deficit.

Treating asset sales as revenue is an accounting trick to persuade unwary observers of the soundness of a sinking budgetary ship. The public sector is no paragon of efficiency in India. The overwhelming bulk of state government PSUs are sick or closed. Central PSUs have done far better, but they too typically withered when faced with private sector competition. The Cement Corporation cannot compete with private cement companies, Hindustan Paper Corporation cannot compete with private paper companies, BSNL and MTNL cannot compete with private telecom players. How then have some PSUs generated massive profits? Answer: the surpluses are, overwhelmingly, windfalls from a global commodity boom. The price of oil, for instance, has risen from $18 a barrel in the late 1990s to over $100 a barrel today. Coal and iron ore prices have risen almost as fast. Before 1991, price controls kept domestic mineral prices well below global rates, and public sector profits were modest. But the freeing of price controls, plus the global boom, has produced a windfall. The recent depreciation of the rupee by 20% will boost the windfall further. The big four mineral-extracting PSUs have cash in hand of Rs 1,15,000 crore. This does not reflect any great efficiency on their part. On most global production criteria, these are not highly productive companies. Output per man-shift in coal, for instance, is far below levels in China or Australia. The ONGC has a very poor record in production, and some fields that it surrendered to private sector players have subsequently done much better. How should the massive mineral windfalls be utilised? Remember, the minerals will run out one day. India needs to wrestle with this question, that earlier seemed relevant only to mineral-rich countries like Saudi Arabia, Nigeria, Norway and Chile. Historically, many countries in Africa and Latin America reacted to mineral bonanzas by going on a spending spree. Much money has simply been stolen, much has been spent on grandiose but dubious investment projects, and some has been spent on infrastructure and social development. Many experts advised these countries to save rather than spend windfalls in periodic commodity booms. This caused new problems. In the absence of enough good investment avenues, saving a boom at home led to real estate bubbles that later burst, and high inflation. To avoid this, countries recognised the need to save part of their windfalls abroad, not at home. Thus was born the notion of the sovereign wealth fund. This saved surpluses in foreign assets. It also meant current windfalls were preserved for use by future generations at a time when mineral wealth would have been largely exhausted. Many Gulf countries, Norway and Chile (the world's biggest copper exporter) earmarked part of their windfalls for sovereign wealth funds.

In India, companies like ONGC, OIL and Coal India have started investing in mineral blocks abroad, and this is a useful form of saving windfalls abroad. But this does not flow from any overarching strategy: each company has done what it felt like. No doubt the companies need flexibility on this score. Yet, given the size of the surpluses, we need to start a debate on how to use mineral windfalls. Clearly, a large part of the windfall must be used for current infrastructure and social spending. But not all of it. Already a significant chunk of mineral windfalls are transferred to central and state governments through royalties and taxes. The latest move to raid PSU surpluses for budget support will transfer still more to current spending. There must be limits to this. This column has no space to enunciate all the possible principles. Its aim is simply to highlight the size and nature of the mineral windfall, and start a debate on what proportion should be saved for future generations.

Connectivity and skills should be the twin aims of the 12th Five-year plan
The Planning Commission wants to rework its draft of the 12th Five-Year Plan (2012-17). The 11th Plan, which set 27 goals aiming at inclusive growth, failed to achieve most of them. The 12th Plan is expected to aim for "faster, sustainable and more inclusive growth". But all Plans have had similar names. So, this looks like a rehash of all the old goals rather than something new. Indeed, cynics could call the 12th Plan the 12th Approach to the Same Plan. Arun Maira, member of the Planning Commission, wants the organisation to drive policy rather than just tinker with allocations. Yet, the political economy of India will not allow the Planning Commission to do much more than reshuffle allocations. Economic and social policy is certainly not driven by research or even common sense, but by short-term electoral compulsions and constant surrenders to the realities of coalition politics and the lack of majority in the Rajya Sabha. Thus, inclusive growth has come to mean ever more subsidies plus reservations based on caste and religion. This provides palliatives and charity, and keeps disadvantaged people as objects of pity. True inclusive growth should empower the disadvantaged to break old boundaries and become objects of envy rather than objects of pity. An estimated 200 million Indians have flourished beyond all expectation by riding the globalisation bandwagon, which has been made possible by two inputs: global connectivity and skills.

Much of rural India lacks connectivity, even in the basic form of pukka roads. Inclusive growth requires every village to have a pukka road, telecom, electricity, a functioning school and health centre and access to vocational training. These are the elements that will create both connectivity and skills. Ideally, labour laws must also be changed to encourage labour-intensive manufacturing. Once the state provides these, the rest of India can take off like the leading 200 million. There is, of course, an important place for welfare schemes: they can provide vital support to those in deep distress. Welfare is a palliative, not a cure for poverty. The cure can only come from connectivity and skills

Tata Nano recall shows product recalls are a risky exercise

Product recalls are double-edged swords. There is the risk of adverse publicity. It also means an immediate cash outgo, so it hits companies where it hurts them most: their bottomline. It is, therefore, no surprise that companies and the Tatas are no exception are coy about terming such exercises product 'recalls'. In the Indian context, product recalls are also relatively novel. Unlike Western markets where the Tylenol recall by Johnson and Johnson in the early 1980s and the Firestone and Bridgestone tyre recalls are now part of management case studies, product recalls in India are few and far between. Part of the reason is that till recently, India was largely a sellers' market. Customers were also less aware of their rights, so companies tended to be more cavalier in their attitude to product defects. However, all that is changing. In many sectors, automobiles being one, customers are spoilt for choice. Thanks to laws like the Consumer Protection Act, they are also much more aware of their rights. Consequently, auto manufacturers have to be proactive; the take-it-or-leave-it attitude of the past is now history. Recently, Toyota recalled 41,000 Etios and Liva cars to replace a faulty inlet pipe to the fuel tank. In September 2011, Honda Siel recalled 72,115 units of the City sedan to fix faulty power window switches. In early 2010, Maruti Suzuki recalled almost one lakh A-Star cars to fix a defect in the fuel tank. So, what is novel about the Tata Motors recall is not the scale, nor the fact of the recall, but the fact that that is virtually a first by a homegrown company. That, perhaps, explains why the Tatas are so wary. In truth, their wariness is unwarranted. Yes, there is the risk customers might interpret the exercise in this case, replacement of the Nano's starter motor as a sign that the product is flawed (after all, why else would a

company be willing to replace it)? But there is also the possibility that the company earns the goodwill of its customers as a consequence. Which of these two possibilities finally plays out in the market depends on a number of factors, prime among which is goodwill.

Subscribing to digital
Digitisation of cable TV should not be derailed. If it hurts operators, increased FDI is the way out. The recent amendment to the Cable Television Networks (Regulation) Act of 1995 has paved the way for full digitisation of Indias cable television network by end-2014. The amendment, drowned in the din over the policy paralysis at the Centre, will significantly alter the cable television business. There are a few glitches that still need to be ironed out. But the government should stay the course and take digitisation to its logical conclusion. For the broadcaster, it means an improved business model. Digitisation will mean a cut in carriage fees because the pipe can now carry more feed. Broadcasters have consistently alleged that local cable operators understate the number of subscribers in order to inflate their profits. At the moment, 45 per cent of the subscription money goes to the broadcaster, 35 per cent to the multi-service operators and 20 per cent to the local cable operators. Digitisation will put a face to all subscribers, introducing much-needed clarity. If there is understatement at the moment, digitisation should lead to an improvement in the broadcasters share. The consumer, meanwhile, will get feed of a better quality, and can watch the channels he wants instead of having to watch whatever the cable operator offers. It is expected that average monthly payments will not rise significantly, because India is a hyper-competitive market: local cable television operators are fragmented and there are close to 650 channels available. In any case, there ought to be a degree of realism in the prices of television channels. Most people pay a monthly cable bill of Rs 150, which is less than what it would cost a family of four to watch a three-hour film in a theatre in a Tier-III town. The sector regulator, the Telecommunication Regulatory Authority of India (Trai), has put out a consultation paper on tariffs; a final view will be taken after opinions and counterpoints have been submitted by the end of January. The real uncertainty is at the middle the multi-service operators and the local cable television operators. The cost of digitising 70 million homes could be as high as Rs 15,000 crore. The multi-service operators will have to foot the bill. It is also likely that consumers digital settop boxes will have to be subsidised, just as with direct-to-home (DTH) television. There is a cap of 20 per cent on foreign direct investment (FDI) in the sector. Foreign institutional investors can hold another 29 per cent, but that money goes into the secondary market and does not come to the company. To make good these investments, the multi-service operators will have to, therefore, depend largely on the local cable television operators. There is, thus, a conflict of

interest between multi-service operators and the local cable television operators over subscription revenue. This is another matter that the Trai consultation paper aims to resolve. To ease the situation, the government can look at revising the 20 per cent cap on FDI. That will reduce the pressure on multi-service operators as well as the local cable television operators. The process of digitisation should not be allowed to be derailed.

Hacking the sarkar

The price of e-governance is careful oversight of cyber security. How is the govt securing its networks? Municipal corporations around India have traditionally been plagued by ghost employees that exist only on paper and yet somehow draw salaries and pensions. Now, scamsters with the same mindset have discovered ingenious ways to exploit cyber-enabled governance systems. Fake names were reportedly entered in the computerised births and deaths register of the Pune Municipal Corporation by a hacker with the username Jahangir. The ghosts qualified for a slum rehabilitation scheme, wherein they would receive 350 square feet each, in lieu of relinquishing (in their case, non-existent) dwellings. This has even more serious implications. If a hacker penetrates a municipal system to set up a credible identity, he can then obtain a passport, permanent account number or a PAN card even if he cannot directly penetrate the institutions that hand out these documents. If he can penetrate a land registry, he can tamper with real estate records. Every level of government is increasing its use of information technology (IT). Smart systems massively improve efficiency of governance; they speed things up, they reduce the scope for petty corruption and harassment. But, as IT-enabling grows, so does networking. If a traffic policeman in Pune enters a car registration number and swipes the drivers licence on his smart reader, he gets an instant update on vehicle status, as well as criminal cases outstanding against the driver. The smart readers reduce corruption, speed up traffic enforcement, and help nail criminals, recover stolen vehicles, etc. The reader connects to the databases of the National Crime Records Bureau, sundry Motor Vehicles Departments, the Pune traffic police, and magistrates courts. And if any of those systems are vulnerable, they all could get hacked. On a different scale altogether, regional power grids connect to each other. They balance electricity supply and demand from various plants, states and regions, monitoring voltage and downtime. This must be done via computer no human can handle it. A Stuxnet-style worm could bring the power grids down, just as Stuxnet crippled Iranian nuclear plants. Airports, railways, and ports are similarly networked and vulnerable. So too are the citizen-facing systems that vastly reduce the pain of filing income-tax returns, receiving tax refunds and passport applications. Other, non-citizen-interfacing, databases are run by the National Crime Records Bureau, the Reserve Bank of India, the finance ministry and the ministries for roads, shipping, defence, etc.

All carry information that could be utilised either for competitive gain or to breach national security. All can be compromised. In networks of networks, the security is only as good, or as poor, as the least secure node. There needs to be a coherent plan to secure every node and comprehensive disaster recovery and mitigation plans. The Pune Municipal Corporation may just be the tip of the iceberg. There is anecdotal evidence that various government websites have been hacked and defaced. There is no evidence that much has been done to prevent deeper penetration.

Much to account for

Moodys upgrade should start a long-overdue correction. Credibility of the big credit rating agencies is under threat The upgrade of rupee-denominated long-term Indian government debt by the rating agency Moodys on Wednesday should not be cause for excitement. Moodys itself recognised that it was just a correction in the bias inherent in its rating of foreign currency-denominated Indian government debt as more secure than rupee-denominated debt. Yet this should be seen only as the beginning of a much-needed correction. It is not just that Moodys is the only agency so far to have made this call. It is also that, even at this revised level which makes rupeedenominated debt investment-grade Indias economy may continue to be rated at a level that does not accurately reflect its fundamentals. The best way to see this is to examine ratings given to other countries sovereign debt, and to compare indicators for their economies with those for Indias. The most worrying outlier is surely the United Kingdom, which continues to be rated Aaa/stable by Moodys, the agencys highest possible rating. Yet its giant financial sector is in trouble, and it will likely see a significant slowdown in growth and revenue as the Conservative-Liberal Democrat coalition enforces harsh austerity measures. And what do the numbers show? A debt-to-GDP ratio 12 percentage points higher than Indias and a budget deficit that is at 10.3 per cent of GDP, where Indias is still below five per cent. Indebted, crisis-hit southern European countries, meanwhile, continue to enjoy the rating agencies patronage. Spains budget deficit is 9.3 per cent, but its government debt is still Aa2, many rungs above Indias debt. As is Italys, with a debt-to-GDP ratio of 120 per cent. Even Indias peers in the BRICS nations are rated higher, in spite of problematic numbers. South Africa is a comfortable A3, although its current account deficit is a high and vulnerable 3.8 per cent of GDP; Indias is at 2.7 per cent of GDP and yet the agencies will claim they are worried about it. Brazil expects economic growth barely beyond three per cent, a fall of four per cent. Its economy, heavily dependent on exports to Europe, is singularly vulnerable to the euro zones instability. Yet its government paper is rated by Moodys at Baa2, a step above Indias new rating.

Seen in this context, it becomes clear that the revised Moodys rating should only be the beginning of a process of rationalisation. This process should not be limited to Moodys, but should extend to the four other internationally-recognised credit rating agencies. The upward revision should definitely not be taken to mean that Indias government is doing something right, or that there are grounds for optimism about policy. By many tellings, the greatest structural flaws that led to the global financial crisis of 2008 were revealed in the errors of those supposedly reporting on the world economy the credit rating agencies. They should be thinking, hard, about how to recover credibility. Perpetually under-rating some economies and over-rating others when the whole world can do the maths and figure out how theyre wrong is unlikely to help them recover ground.