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Rising, Falling

Rupee appreciation brought good and bad tidings, ultra power projects got approved, farm policies went haywire, and SEZ projects led to violent protests...

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Rising, Falling
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Rupee Rises: Brings Good And Bad Tidings

Grappling with multiple concerns, the 12 per cent appreciation in rupee sinceApril 2007 and around 15 per cent since October 2006 has been both a boon aswell as a cause of concern for India. On the brighter side, the steep rupeeappreciation against a weakening dollar yielded downward pressure on inflationand helped trim India's import bill. This helped to partly cushion India againstspiraling crude oil and fertilizer prices and eased the attempts to sourcewheat, so as to create buffer stocks for domestic demand.

In a new report, global financial services major Goldman Sachs, however, statesthat despite expectations of further rupee appreciation, inflation would go fromthe current level of 3.75 per cent and an estimated 4.5 per cent for 2007-08 to4.4 per cent in 2008-09, as loose liquidity passes through into price-rise.

One of the main reasons being that import-dependent India, which has for wellover a year not passed on to the consumers the full price impact of global crudeoil prices, may be forced to hike prices of petroleum products that are bleedingthe state-owned oil marketing companies. Despite crude oil prices scalingall-time high levels of close to $100 a barrel last month, the government has sofar shied away from hiking the retail prices of petroleum products. Given theballooning subsidy bill, the it may, however, be forced to review the situation.Goldman Sachs estimates that domestic retail prices of petroleum products needto be hiked by 20 per cent but it is unlikely that the government will increaseprices by even 10 per cent given that general elections are just a year away.

The biggest negative impact of rupee appreciation was felt on the export front,particularly in sectors with little import content. The result is hundreds ofexporters are striving to keep their business alive against fierce globalcompetition. Seeking further sops from the government to tide over the difficultperiod, most export bodies stress that it is not the currency appreciation butthe steep rise in a short span of time that is hurting exporters. Many havestarted taking recourse to various market instruments to hedge against currencyrisk while gearing up to lower operational costs and become more competitive.

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With experts anticipating a further hardening of the rupee and the expectedslowdown in the US economy, which remains India's main export market, it seemsunlikely that India will achieve its export target of $160 billion. CommerceSecretary G.K. Pillai is of the view that if the current trends persist, Indianexports during 2007-08 will reach around $140-145 billion.

Apart from commodities export, Indian companies engaged in export of servicesare also feeling the pinch due to appreciation of rupee against the weakeningdollar.

India Takes Ultra Power Projects Mode
Striving to surmount the growing power shortage in the country, this year sawIndia embarking on plans to set up Ultra Mega Power Projects (UMPPs) of 4,000 MWeach with the award of contracts for three projects in Mundra, Sasan andKrishnapatnam. There are more than seven UMPPs under consideration though noneof them will be completed by 2012, when India estimates the demand to be over200,000 MW.

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Experts expect the peaking shortfall in the country to go up from 12 per centcurrently, to around 14 per cent. To meet this shortfall, India has set anambitious target for adding 78,000 MW generation capacity by 2012. This isaround the capacity China has been adding annually.

Few believe this is an achievable target in India where five-year plan targetshave routinely been missed. During the Tenth Plan period (2002-07), India couldonly add 21,280 MW, a little over half the targeted 41,110 MW. Till November-endthis year, an additional generation capacity of 4,380 MW had been commissionedagainst a target of 16,335 MW for 2007-08.

Farm Policies Go Haywire
From hundreds of farmers committing suicides, particularly in progressivestates, to foodgrain shortfall despite a bumper wheat crop, with productiongoing up from 69.35 million tones to 74.89 million tones, India has seen itsfarm policies go haywire this year.

For the second consecutive year, India had to import wheat in 2007, this timearound four million tonnes, despite high global prices due to tight supplyposition. Indications towards the year-end are that the government may have tolook at import options for rice also to meet its buffer stock requirements asfarmers are once again showing preference for private companies. The flaw liesin the government not taking into account the increasing input costs inagriculture and setting minimum support price (MSP) for crops like wheat andrice which are way below market trends.

The government move to import wheat at almost double the price of what farmershad been paid may have been targeted at meeting buffer stock requirements andalso used as a means to keep domestic prices in check. This has not gone downwell with the farmers. And is apparent from the fact that this year, wheatacreage till mid December was 206.32 lakh hectares as compared to 234.48 lakhhectares during the corresponding period last year. 

A worse scenario seems set for the sugarcane with many farmers still to be paidtheir dues by sugar mills while in Uttar Pradesh farmers are finding no buyersat state government fixed rates. While the government has announced sops for theindustry conditional to the farmers' dues being paid, the Consortium of IndianFarmers Association has pointed to the reluctance of sugar factories to fulfilltheir part of the bargain due to losses suffered because of government ban onexports earlier this year.

Whether sugarcane, wheat or rice, the government policies with regards farmersseems contrary to the Agriculture Policy (released in 2000) or the NationalPolicy for Farmers, (released last month), which is based on the recommendationsof an expert group headed by MS Swaminathan. The important question is how isgovernment planning to meet its avowed objective of ensuring food securitythrough four per cent annual farm sector growth without addressing the farmersissues of market linked prices for their produce, better access to technologyand other farm inputs, and most importantly better irrigation facilities?

SEZs: Stealing Land Or Creating Wealth
The year 2007 has been marked by agitations, often violent, by farmers andvarious political lobbies protesting government efforts to promote SpecialEconomic Zones (SEZs). With no clarity in policy over the land acquisition andresettlement of farmers and people displaced, the year is set to end on sournote with a stormy protest slated to rob picturesque Goa of its traditional NewYear revelry and peak tourism season.

Across the country, whether in West Bengal, Uttar Pradesh or Maharashtra,such agitations have been seen as scores of private companies rushed in to graba slice of SEZ opportunity, inspired by Chinese success in exports, to raiseIndia's share in global trade from low levels of around one per cent. Theargument placed in favour of SEZs is that it will attract foreign investmentsand generate employment in lakhs.

So far, of over 400 SEZ proposals to have received approval, 172 SEZs havebeen notified and are operational in 17 states and union territories. Of theseover 50 per cent are IT related. While some of the states like Haryana andHimachal Pradesh have become wiser and put in place safeguards to protect therights of people whose land has been acquired by private developers, there isdefinitely much more that needs to be done. For one, while the governmentprofesses that acquisition of fertile agriculture land for SEZ will not beallowed, the fact is that this is not really happening. This is giving rise to alot of heartburn among farm groups as seen in West Bengal and now in Goa.

Critics of SEZ say that it has become a garb by deep pocket industrial groupsand foreign investors to acquire land for real estate development. While thecommerce ministry denies this charge and points out to various safeguards inplace, there are many who point to loopholes in the rules. It remains to be seenwhether the SEZs will really help India to scale up exports and grab a biggershare of global trade or it will see companies use these tax-free havens to tapthe domestic market through investments in import substitution projects likebeing done by many telecom companies in south.

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