Byapaar.com -The Indian Business Blog

Inflation has been rising and rising high touching a 13-months record at 6.68 during last week. Indian government has naturally become nervous as general election is not far away and it does not want to be seen a failure to control price rises just before election. So it has called a high level cabinet committee meeting as to how it can tackle the disturbing inflationary  trend.

But it is almost clear on how it plans to from what P. Chidamabaram, the Finance Minister suggested! According to him inflation has to be curbed even if it is at the cost of growth. The Indian industry has sharply reacted to the suggestion made by Mr. Chidambaram. According to Mr. Sanjay Budhia, the Chairman of CII ( Confedaeration Of Indian Industry) - the government should adopt a policy that would support a balance between industrial growth and inflationary reduction. Any hasty measure by the government to bring down inflation would result in loosing the momentum of growth that India has seen over the last decade or so.

Indian economy has been one of the fastest growing economies in the world for last one decade or so. Its Gross Domestic Product (GDP) has been growing consistently over 7 percent. The India Central Government has finally decided to reward its 3.5 million strong civil servants by way of its Sixth Pay Commission recommending and increase of 30-40 percent salary hike.

But initial reactions to the recommendations are that of disappointment because in the words of Justice B.N. Srikrishna, chairman of the commission,

” I told the finance minister that my recommendations will displease everybody…… ”

But nobody - neither political parties nor employees’ unions have  commented so far on the 658 page report.

It seems that the biggest beneficiaries will be those in the higher echeleon  of the bureaucratic hierarchy. The contentious issue about the report is that - it recommended pay hike but at the same time it wants the government to trim its workforce. It also recommended downsizing the service tiers from 35 at present to 20 tiers. It also recommends for introducing 5 pay bands to cover all ranks.

The civil servants are to get rank pay along with basic salary. For example, the highest ranked officer in India, the Cabinet Secretary will get a consolidated monthly salary of Rs. 90,000 besides allowances and perks. But still it is far too low than those CEOs in private companies. What is attractive though is the position, security and other related benefits that come along with a government official.

PS: I’ll follow-up this post with Salary hike in PVT. sector within next few days and make a comparision.

The European Union (EU) and Indian government have been trying to come to a Free Trade Agreement for quite sometime now and it was to get formalized by the end of this year 2008. But what has been coming out of it has become a  big frustrating experience for the Union Government.

The main contentious issues are still to be addressed properly  and not only that, instead of problems being solved, they are mounting by the day. The negative list, non-tarrif barriers and other differences remain though time is running out. India wants its service industry to get more ground in the EU and the EU wants its products to have easy access to the vast Indian market.

A ministerial meeting is scheduled to be held next month between the two parties in order to sort out differences and exchange negative lists. But negative lists of both sides are growing by the day as more and more products and even allied industries  are seeking protection in the negative lists. The EU has already handed over its negative list that might affect India’’s export of goods primarily based on petrochemical products, not to mention textiles, cosmetics, glassware, fertilizers and pharmaceuticals. Originally, India and the EU were supposed to keep 90 percent of the products under the agreement. But it seems that the figure will decrease to a great extent. The finalization of India’s negative list is still going on as more Indian companies or products are lobbying to get into the negative list to protect their business. It should be mentioned that, goods falling under the negative list would cost more due to high tarrifs.

According to a study by FICCI (Federation Of Indian Chambers Of Commerce and Industry), the Indo-EU trade could reach $572 billions by 2015 if the agreement is properly and timely  implemented. Naturally, Kamal Nath, the Indian Commerce Minister is very disappointed with the slow pace of talks.

On the other hand, some experts feel that India should forget these kind of agreements and look for more pacts which would be integrated with India’s reform policies and thuse bore more fruits.

In an unprecedented mood a world consortium of Central Banks from many leading countries led by the US Federal Reserve (Fed) have tried to infuse huge liquidity in the credit market which is starved of funds. This caused a positive response from the market which has been on a sustained bull runs for last few months. The DOW JONES immediately opened at 250 points higher than the previous closing.

The US Fed has declared on Tuesday that from now on financial firms can use home loan mortgages as collateral for the next 28 days. This released about $200 billion in the US liquidity market. On the other hand the European Central Bank, the Bank of Canada, Swiss national Bank and the Bank of England have also announced measures to infuse huge fund simultaneously to arrest the contraction of market trends every where. The burnt of these measures was felt by the bond market that has naturally crashed.

Martin Blum, head of emerging markets research at UniCredit in Vienna said

“In the near term, the Fed and global central banks have provided the thing everyone needed, and that’s cash”.

As part of latest policy updates, the Bank of Canada provided C$4 billion, Swiss National Bank $6 billion, and the European Central Bank said it would auction bonds for a term of 28 days thereby providing $15 billion to the credit market.

But some market analysts say that, these measures by the world consortium might revive the market immediately, however questions remains how far these soaps would go in reviving the world economy as a whole for a long duration that everyone longs for.

“The Fed action is good for a day or two”

according to Michael Cheah of AIG Sun America Market Management.

In the Indian context, the market which has been on a sustained bull run for nearly two months and lost almost 30% seems to be upbeat with the latest move which is evident from a jump of 1.25%  of share prices in the BSE Sensex .

“It will be certainly good for our markets. Some action was necessary from the Fed and they are going in the right direction. Our markets have been on a recovery path and additional support by the Fed will consolidate gains further in the domestic markets”

said Kunj Bansal, senior vice-president, portfolio management services at Kotak Securities. Evidently Indian market has recovered significantly since Tuesday.

Coupled with continued bull run in the Indian stock market, another problem is lurking that might hamper the country’s resolution to achieve higher economic growth with price stability. Inflation rate has just crossed the 5 percent mark for the first time in last 10 months. Week ending on 23rd February pegged the Wholesale Price index at 5.02 percent. Rising food price and increase in cost for manufacturing good are some reasons for the inflation to shoot up.

the apex bank in India is a bit worried about the recent spur in inflationary pressure. Mr YV Reddy, the Governor of Reserve Bank of India expressed his concern in a symposium held in Paris on “Globalization, Inflation and Monetary Policy” . According to him

“In the Indian context, considerable weight is currently accorded by the RBI to price and financial stability while recognizing it twin objectives of growth and stability”.

The Indian government is looking to control the the inflationary pressure below 5 percent and targeting to keep it around 4-5 percent. But still consumers are feeling the heat.

The third quarter review of Indian Monetary policy released by the Reserve Bank of India recently revealed that RBI has decided to retain the key rates in a bid to maintain financial and price stability. Keeping in view of the domestic and international financial conditions, the RBI has decided to leave unchanged all key rates, including repo (7.75 percent), reverse repo (6 percent) and Cash Reserve Ration or CRR (7.5 percent). The stance of the policy is to contain inflation close to five percent while conditioning expectations I the range of 4 to 4.5 percent. The Gross Domestic Product (GDP) projection for the year 2007-08 also remains same at 8.5 percent. The flexibility to conduct overnight or longer term repo including the right to accept or reject tenders under the liquidity adjustment facility (LAF) wholly or partially is retained. The major highlights of the monetary policy include emphasis on credit for employment intensive sectors, reasonably positive prospects for industrial sector, favorable prospects for services etc

The Indian Finance Ministry has recently announced a ten year tax holiday for developers f industrial parks set up during April 1, 2006 to March 9, 2009. The incentive is primarily aimed at providing a boost to India’s industrial infrastructure. The Industrial Development Scheme 2008 notified by the Central Board of Direct Taxes (CBDT) held that the industrial park developers would be eligible for 100 percent tax deduction which would be provided for ten out of fifteen consecutive assessment years after the commencement of operation of such units. Under the scheme, an industrial park should have at least 30 units. To avail of the tax benefit, the industrial park would have to be owned by a single undertaking. The area allocated or to be allocated to industrial units would have to be at least 90 percent of the allocated area. Ministry sources clarified that such industrial parks developed operated or maintained during 2006-07 would have 2007-08 as tax assessment year.

The Indian Government on January 30^th brought major changes to Foreign Direct Investment (FDI) rules, easing existing curbs on overseas capital in such key areas as real estate, petroleum refining, commodity exchanges, mining and aviation.

The decision taken at a meeting of the Cabinet follows a month-long review of the FDI policy, which the government began as part of efforts to boost foreign capital inflows. The review however did not include the politically conscious issue of allowing foreign multi-brand retailers like Wal-Mart and Carrefour to open front-end stores here.

The changes cleared by the cabinet included increasing the limit of FDI to 100 percent for titanium mining and aircraft maintenance companies from 49 percent to 74 percent in cargo and chartered airlines, from 26 percent to 49 percent in public sector refining companies.