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Thursday, February24, 2011 Reflectw w w . f i n a n c i a l e x p r e s s . c o m 9

Pradip Shah, chairman, IndAsia Fund

Advisors,who tracks theIndian financial

scene closely, believes foreign flows could

taper off this year as investors look for

opportunities in other markets. In a con-

versationwith ShobhanaSubramanian,

Shahsays thatthis couldleave theprivate

sectorwithless moneywith which tofund

itsgrowthplans.

What are you making of the macro-

economicsituationwithgrowthslow-

ingdown?

For the last 30 years weve had a g rowth

rateof 6.2%and withthereformscoming

in,therewas considerableprogressso,in

the last few years, weve seen 8.5%. But

whenwe compareourselves withChina,

wecannotbutbedisheartened;wewereat

the same level in 1990their GDP was

$910billionandwewereat$720billion.To-

day,theirpercapitaincomeisat$4,500and

wereroughlyatonefourth.Eveninterms

of purchasingpower parity,t heyretwice

usat $6,500(wereat$3,300).So,clearlywe

havea lotof catchingup todo. Butwhen

weseewhatis goingon inIndia,wewon-

derwhetherwe willevercatch up.There

are such brilliant people in government

butno governanceand noaccountability

for wrongdoing. We are perpetuating a

cultureof allowing wrongdoingto goon

unpunished and were encouraging the

young generation,whichis ourfuture,to

thinkinthismanner.

Instead of hitting 9% GDP growth,

weregoingbackcloserto 8%...

Yes,we areseeinga slowdown. Thecon-

sequence of inflation for the poor has

beensosevereandthepressureonhouse-

holds has been so high that people have

hadtocutbackonessentials,likesoap,to

maintain food budgets. We see govern-

ment policies that are well-intentioned

but implemented badly and allow for

leakage, so the benefits dont go to the

poor.And there areotheradverseconse-

quences too. While the mid-day meals

have helpedattendance in schools,chil-

drensproteinintakeandsoon,werenot

seeingthesamewiththeNREGA.About

Rs1,12,000crorehasbeenspentinthelast

five years. What is the outcome? These

expendituresweresupposedto resultin

some outcome and we are supposed to

havesomeaccountability.

Butweveseen nothing;itsbeen

allowedtobecomea blackholewitha lot

of leakage. There has, no doubt, been

some benefit, but a lot of it has seeped

away into the hands of politicians. And

where it has reached the poor, it has

unfortunatelyhad thedeleteriousconse-

quenceof discouragingproductive work

and so underemployment is getting

perpetuated. So, we need to fine-tune

NREGA.Becausethe governmentis con-

cerned about votesin thenexttwo anda

half years,it wantsto comeup withmore

programmes like the Right to Food. No

one objects to these but there cannot be

seepage. The Congress knows that sops

area politicalweaponbutthesehavedys-

functional consequences via subsidies

distortingtheeconomy.

How are investors reading the slow-

downandthepolicyparalysis?

Without doubtthereis somedisappoint-

ment among investors. Even when we

wereemergingfrom theglobal crisis,In-

diawasgettingapremiumtocompetitors,

likeChina,butthathas beena short-lived

period.Werenowbacktoa discount and

its facile to say that its a discount for

democracy. Within the democ racy, we

have shining examples of competent

leadership and liberalisation, like in

Bihar, wheretherehas beeninclusive

development.So, investorsare willing

tocomeinatadiscountbutnotatapre-

mium. The Reliance-BP deal is one of

thelargestFDIinvestmentsintoIndiaso

far and it means strategic players are

willing to come in because India has

demonstratedgrowthandpromisesmore.

But along with that growth will come

dissonance because if the needs

of the poor are not ad-

dressed, law and order

will become a prob-

lem.Whilestrate-

gic players will

com e i n b e-

cause they

cannot afford to stay outyou see

Siemensmakinganopenofferata multi-

ple of 39 timesclearly there is some

caution. The financial investors, who

havetheabilitytomovemoney,areasking

foradiscount,notapremiumthatwewere

askingforlastyear.

So what kind of foreign portfolio

flows do you see this year compared

withtherecord$29billionthatwesaw

lastyear?

I think it should be substantially lower,

giventhegovernancestoriesthatarecom-

ingoutand giventhe opportunitiesforin-

vestorsin othermarkets.The USmay not

beboundingaheadbutitscertainlymov-

ingtowardsgrowth.Perhapsyouwill see

the same in some European economies.

Germany, for instance,

continues to do

well.Sopeoplewill seeopportunitiesout-

side, perhaps even in China, which has

managedtohold itsowncomparedto oth-

ers.Therefore,Indiawillbelessattractive

to foreigninvestorsbecausethe competi-

tionisdoingbetterandourownproblems

aretarnishingourimage.

A fair share of the foreign flows

goesinto theprimarymarket.Given

thatinterestrates areinchingup, do

youthink companies mightbe short

of funds?

Logically, our investment to GDP ratio

shouldfall;it hasalreadycomeoff froma

peakof 37%oddto34.5%.I heardthegov-

ernmentsayitisexpectinganinvestment

toGDPratioof 36%andIwonderwhether

that is achievable. Interest rates are al-

readyhighand theavailabilityof capital

hasbecomemoredifficult,fromboththe

equity and debt markets because of the

tight liquidity situation weve

beenencountering.Soitisnotpos-

sibletobesosanguinethatwewill

have 36%. Also, we have not yet

broughtdownourcapitalto out-

put ratio as we should; as infra-

structure improves, one would

expectthat to happen.Also there

is a bit of gold-plating in capex

and easy availability of capi-

tal led to over-expenditure

oncapexso,tosomeextent,

wemayhavehiddencapaci-

tyor hiddenpossibilitiesof

getting higher revenues but

wehavenotbeenabletoexploit

them.Whateverit is,at36%one

wouldexpect agrowthrate of 9%

is possible. But we will not

achievethis because, as Isaid,

wewillnot achieve 36%;we

willpossiblyachieve32-33%

investmenttoGDP.Because

thereare somany projects

in the works and they

willhavetobecompleted.

The government is no

longera leaderin start-

ing new projects

andwe arerelying

onthe privatesec-

tor. So, we need

a facilitative

capitalmarket

to fund the

growth.

Will government borrowings crowd

outgrowth?

Oneof thegood thingsthathappenedthis

yearwasthat thegovernmentdidntneed

to borrow too much because it earned

fromspectrumlicencesanddivestments.

Itisnowspending,aspartof itsbudgetary

expenditure,andsomoneywillcomeback

intothesystemandthatwilleasetheliq-

uidity in the market. But the uncertain

partishowmuchmoneywillflowinfrom

outsidebecausethatwas alsosupporting

liquidity in the market; if money flows

out,wewillhaveashortageof liquidityin

the system. Also, with the crisis in the

Middle East, there is going to be some

capital flight to safety worldwide, the

MiddleEastmoneywillgo intothedollar.

Oil is at $106 a barrel and that does not

augurwell for India.Weshould logically

have been insulated from some of the

politicalriskof theMiddleEast.Although

we are not in a bad shape politically, but

economicallywecannotbe insulated.

Sohow dowe managethe current ac-

countdeficit,whichwasbeing funded

by short-term flows?

Eitherweincreaseremittances,get more

tourism revenues and invisibles or we

shouldcontrolthe domesticusageof oil.

Thegovernmenthad taken theboldstep

to enable the policy for a passthrough

mechanismbuthasnotdoneit.Sowehave

done it up to $70 but beyond that we are

exposed to a fiscal subsidy. We need to

increase prices of fuels at the pump to

conserveoilandimprovethetradedeficit,

whichis unsustainable.

WhatarethreethingstheFMcoulddo

to reassurethe markets?

Since the government wants to move

towards fiscal consolidation, I think it

should get away from fuel subsidies

immediately because, although there

may be some inflation, it will lead to

the conservation of fuel and, at least, it

will solve the fiscal issue. To ease the

pain, they could phase it out and make

adjustments through the excise mecha-

nism. Dont introduce a food subsidy

bill or a Right to Food Bill just now.

ImprovethePDSbutdontcreatepopulist

expectations because it is difficult to

withdrawthem.Alsoexcisedutiesshould

be trimmedrevenues will come from

better volumes.

Record caFE PRADIP SHAHChairman,IndAsiaFund Advisors

Wewontmeetourinvestmenttargets

It isthattime of theyear,we are

all waiting to see whether the

railway minister will be kind

onemoretimeandallowus tomake

those short orlongtraintripswith-

outmajor bloodlettinginthe wallet.

Butwehaveseenreportsinthepress

thatallisnot wellwiththerailways

andtheministermayhavenochoice

withthebudgetthistimeround.

Awordon what therailwaybud-

getisabout.Itisbothapeepintothe

futureaswellasaplan.Itstartswith

thewaytheearningshavebeencom-

inginandexpenditureismounting,

during the first 9 months, till De-

cember, foran ideaof howthe year

isgoingto end. Withthis picturein

focuscomesthepeekintotheyearto

come. The earnings come mainly

fromgoods andpassengersthatuse

therailway. Thenumbersof tonnes

of goods andpassengers of the cur-

rent year are increased, according

tothe trendthatis seen, and,witha

little more in the name of enthusi-

asm,theearningthat shouldarise,

with rates and fares unchanged, is

workedout. Andthenforthecosts

a percentage is added, because

everybody will receive increments

and also more allowances because

of inflation; plus carrying more

traffic willcosta little bitmore,for

fuel,mainly,plus someforinflation,

and the expenditure figure of the

coming year is worked out. With

boththefiguresathand,wehavean

idea of thesurplus,forwhichthere

arespecificuses.

Apart from just running trains,

therailwaysalso carryoutworkof

replacing worn out track, bridges,

cable and wagons, to improve the

quality of service and to add new

services. All this activity needs

funds and the budget has to make

provisions. Things like new lines,

buildings or profitable assets are

paidforbycapital,whichismoney

provided by the government, in

exchange for a return of about

7% every year. But the rest of the

investment,whichruns intoa good

bit even for replacements alone,

needsto comefromthesurplusthat

therailwaysmake.

Theimportantpartof thebudget

exercise, then, is to tweak the

rates, both for goods as well as

for passenger service, to provide

the surplus needed for the works

activity,apart fromthe portionpaid

forbythe government.

Inearlieryears,this surpluswas

not a great figure and studies

showed that replacements were

not being given enough attention.

Making greater provisions then

forced some increases in rates and

theaxefellheavilyon goodstraffic,

where increases are less visible.

With limits to investment by the

government, the railways took to

borrowing from the market and

there was talk about the railways

falling into a debt trap, unless the

governmentcame forwardand pro-

videdcheapcapital.

Understandingthe natureof the

costsof therailways,however, may

temper our reaction to news about

the department. The costs of the

railways areto a very great extent,

fixed, unavoidable costs, of staff

salariesand of basic maintenance.

Theportionthat risesandfalls with

thelevelof trafficis amuch smaller

portion.The resultis thatafterthe

railways have found a balance of

costsbeing metbyearnings,evena

smallincreasein thelevelof traffic

does not increase the large part of

the cost, but only the smaller part

which changes with traffic. The

earnings, however, increase to the

fullextent.Conversely, if there is a

smalldropinthelevelof traffic,the

bulkof thecostisstillthere,butthe

earningdropsto thefullextent.

During the 1990s and the early

partof thiscentury,theexpansionof

the Indian economy resulted in

greaterrailwaytrafficandunprece-

dentedsurplus.Theriseinrailways

earnings over the decade can be

shownto closelyfollowthe trendin

theGDPandthereislittledoubtthat

the fine performance of the rail-

ways duringtheperiodwaslargely

thanksto theeconomictidalwave.

During this period the railways

posteda recordsurplus,mademore

impressive by window dressing,

evenquestionableaccounting, and

therewereimprovementsinvisible

services,withoutmajorincreasesin

charges and none in passenger

fares.Management instituteslaud-

edtheministerandfinancialdailies

joinedinchorus.

Thencametheslowdown,andthe

lasttwoyearshaveseena snail-pace

growthof railtraffic. Withearning

nearly standing still, expenditure

has grown apace. The Sixth Pay

Commission loaded the railway

heavier than the box wagon; fuel

chargeshaverisenandsohavecosts

all round. The position before the

start of the current year was

grave. But the railways had to save

face and they still came up with

a record works programme, of

Rs 32,000 crore. And funded by a

surplusto comefrominflatedearn-

ings projections and conservative

expenditure estimates.

Thereality check camewiththe

accounts of December 2010, where

theearningswere wellbelowtarget

and the expenditure promised a

healthy excess. A standard way of

managing such shrinking of sur-

plusis toslowdowntheworkthatis

fundedfromthesurplus,andevento

holdup payment of bills.Thishad

beendonetothe hiltlastyearandin

thecurrentyear,theexercisehad to

be started early. But still, spending

on work has many supporters and

theworkcosttillDecember2010was

morethanthecorrespondingfigure

inthe previousyear.

Therailwayshavea challenge in

the budget for 2011-12. They will

needtouseeverytricktobalancethe

books, including, maybe, taking a

loan from the government. But

there is a certain level of replace-

mentand developmentworkthat is

unavoidable.Justforthisfundingin

the normal course, the projections

for the current year may be higher

than justified and for the coming

year,maybe imaginary(astronomi-

cal,greaterthan imagined).

Mamata Banerjees budget will

showif the railwaysare continuing

the charade or will bite the bullet

and tell the story as it is. The rail-

ways area great nationalassetand

pay back in national development

many times the value shown in

theirearningsaccount.It istimeto

look at the railways as a national

responsibilityandallowtheaccoun-

tanttodohiswork.

Theauthoris aretiredfinancial

advisorandchief accountsofficerin

theWesternRailways,Mumbai

FOR weeks everyone

knew that the govern-

menthaddecidedtocon-

cedeto theOppositions

demandfora JointPar-

liamentary Committee

(JPC) probe into the 2G

spectrumscam,andyet,

likethreatened witness-

esin agang war,govern-

ment managers kept

playingcoy.

At the all party meeting convened by the

Speakeron theissue onSunday,finance min-

ister Pranab Mukherjee had gone as far as

askingallleadersto takean oathof silence

as far as the press was concerned. But since

oathsarebut wordsand wordsbut wind, the

kiteflyingcontinueduninterrupted.

Onceit wasclearthat thecommitteewould

besetup,talkveeredtowhowouldheadit.Itis

a peculiarity of the Congress that whoevers

name ismentionedfirstin connectionwitha

particularappointmentgetsjinxed.Theparty

seems to have a particular fondness for the

darkhorse candidate.

Theeagernessforthechairmansseator,in

fact, a membership of this JPC was only in

evidence until it was announced. Congress-

men were told that membership of the

committeewould,insome way,precludetheir

being part of the next big Cabinet

reshufflepromisedbythePMaftertheBudget

session.Thespeed withwhichcandidatesfor

theJPC disappearedremindedoneof aMarx

Brothersfilm.

TheOppositionhas anotherproblem.The

partythatspearheadedthecampaignagainst

A Raja and the 2G Scam, the AIADMK, now

finds itself out of the JPC. With 9 MPs, it is

hardlyinapositiontodemandspace.

While the government should be happy

thatthe monkeyon itsback isnow squarely

theOppositionsproblem,a pieceof news,re-

layedthroughits ally, the Dravida Munnetra

Kazhagam (DMK), has brought the frowns

back. Former telecom minister A Raja, it

seems,wantsto makeonelast standinParlia-

mentanddefendhimself on anywrongdoing.

SpeakerMeiraKumardeniedthatanyletter

hadreachedherasof nowbutthegovernment

ismonitoringallfax machinesveryclosely.

Itis round onefor theOpposition,at least

fornow.But inthesee-sawgameof occupying

the Parliamentary moral high ground, the

lastwordis neverspoken.

Staying on trackMonkeyoffitsback

THE LATEST economic review

fromtheEconomicAdvisoryCoun-

cil to the Prime Minister shows a

sharpdeclinefromitsearlierprojec-

tions on inward foreign direct in-

vestment. In its earlier project in

Julylastyear, thecouncilprojected

inward FDI of $50 billion for the

current fiscaland$55 billionfor the

fiscal 2011-12. But seven months

later, the council has projected

just$27.5billionforthe currentand

$40 billion for the next fiscal. The

declining trend indicates that the

confidenceof foreigninvestorshas

beendentedforvariousreasons,in-

cludingthe delays indecision-mak-

ing and problems associated with

theacquisitionof land.

Interestingly, projections on out-

boundFDIremainconstant.InJuly

2010,the councilhad projected out-

boundFDIof $20billionfor thecur-

rentfiscal.Ithasnowbeenprojected

at$18.2 billion.Similarly,for thenext

fiscal, the projection of outbound

FDI is down to $20 billion as com-

pared with $25 billion in the coun-

cilsprojectioninJulylastyear.This

trendindicatesthat Indiancompa-

nies are increasingly looking at

cheaperassets abroadandare look-

ing at mergers and acquisitions to

scaleuptheiroperations.

The mood of Indian businesses

for overseas acquisitions can be

gauged from a recent survey by

Grant Thornton, which says 40%

of them would prefer to take the

cross-border route to grow their

businessthisyearascomparedwith

9%in2008.Accesstonewgeograph-

ic markets and new technology

fromestablishedbrandsarethetwo

mostimportant motivatingfactors

formakingacquisitions.

In fact, FDI flows on a net basis

wereonly$5.3billioninthefirsthalf

of 2010-11, which is significantly

lowerthanthe$12.3billionrecorded

inthefirsthalf of 2009-10.Thecoun-

cilexpectsthedeclinetocontinuein

thesecondhalf of thecurrentfiscal.

Oneof thereasonsfor thesharpde-

cline in net FDI is the substantial

outflows as Indian businesses

acquired foreign assets of various

kinds, including manufacturing,

services,oilfieldsandmines.

SaikatNeogi

Projectionsall come tumblingdown

NISTULA

HEBBAR

SANANTHANARAYANAN

REPORTERS DIARY

Foreigndirect investment$ bn(projectionsin February2011)

Yea r I nw ard O utw ard

2006-07 22.7 15.0

2007-08 34.2 18.8

2008-09 37.7 17.9

2009-10 35.6 16.0

2010-11 27.6 (50) 18.2 (20)

2 01 1- 12 4 0 ( 55 ) 2 0 ( 25 )

FiguresinbracketareprojectionsmadeinJuly 2010 Source: PMEAC