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New plans to rev India economy

The scheme will protect farmers against extreme changes in weather and protect their incomes, writes Dr Bhaskar Dasgupta.

india Updated: Oct 06, 2003 18:35 IST
Dr Bhaskar Dasgupta
Dr Bhaskar Dasgupta

The India Babble
The week started well with the Sensex closing at 4324 with a gain of 80 points. This was mainly due to the WTO news that poor countries can import cheap copies of patented drugs for health reasons, and India will be a beneficiary of this.

Tuesday saw even further gains after very good monsoon news and ended at 4339, a 30 month high. Then the market moved into a correction mode on Wednesday and it dropped 70 points to 4268, and this was mostly down to profit taking. A piece of bad news came up on Wednesday that FDI slowed down dramatically (56 per cent) up to July this year, compared to the same period last year, due to infrastructural bottlenecks. Surprisingly, they didn’t say anything about just what they are going to do about this.

Thursday saw the Sensex move up again by 53 points after the NASDAQ gains on Wednesday powered up the technology sector. Friday saw a continuation of the good mood with the Sensex closing at 4369. As the free float mechanism kicks in this week, it will be interesting to see the impact, although one wonders whether it will be that effective, as passive fund management is usually not the case within India. As expected, it did not make major waves in the short term, but will definitely have a significant impact over the longer term on firms having a greater free float.

Another nail in the coffin of limited float are the mostly family owned/controlled firms. They will have greater difficulty in raising capital now, and as foreign capital is flooding in, this situation will get exacerbated.Speaking of which, foreign institutional investments for 2003 are now already more than $3 billion and still counting. These have been invested in both equity and debt markets. Standard and Poor revised Indian banking system's outlook to stable from negative, following a range of structural reforms aimed at the banking sector. There is still much to do, but it is a good start.

An interesting scheme has started in Andhra Pradeshunder the auspices of the World Bank and International Finance Corporation. The idea is essentially that small farmers can purchase insurance policies to protect them against extreme changes in weather patterns. A fascinating and really good move, something which will protect the incomes of the farmers. This could have a ripple effect across the entire economy, if it takes off. Now are the grand poo bah's of Bihar and UP listening? Oh! I am sorry. They are too busy with elections, temple issue and celebrating birthday parties.

The Finnish tractor unit's £350 million bid by Mahindra and Mahindra is turning more curious. Despite the country's determination to flog off its non-core public sector units, the fact that it is an Indian firm seems to be causing some soul-searching in the Finnish ranks, so much so that there appears to be a thinly hidden “white” knight attempt. One comment was: "This is selling off the family jewels and that too from India, reverse colonialism or what?"

I did chuckle at that one, way to go!

The Babble in the Ivory Towers
At the end of the day, productivity matters to an economy. The growth in productivity also gives an indication of how the economy is learning to cope with changing circumstances. Policy makers try various strategies to improve
productivity, such as increasing education and training funds, pumping more money into research and development, allowing performance improvements, etc.

One of the key elements, which is almost always ignored, is the impact of foreign ownership and technology on domestic productivity. Koen de Backer and Leo Sleuwaegen investigated this phenomenon empirically in a recent paper in the Economics Letters and came up with interesting results. Just as an aside, they are from the Catholic University of Leuven, Belgium and a more pretty university town you will not find. The chips and beer are just great.

Anyway, the authors analysed how foreign ownership contributes to productivity growth in domestic firms. They concluded that foreign firms contribute disproportionately to aggregate productivity growth, while resource reallocation processes are reported to be significantly different among foreign subsidiaries and domestic firms. The difference in labour productivity between domestic and foreign owned firms arises from the difference in technology and capital deployed. The foreign firms are more capital intensive and the capital usage per worker is higher as well. One of the very good reasons for countries to allow foreign capital in, is to allow better technology and resource allocation to increase productivity.

Details of this paper and past columns are available on

The World Babble
With Monday being a holiday in the US, the entire world was treading water. Japan was pretty nifty with the Nikkei 225 hitting 10690, a 14 month high, mainly on expectations that the US market will be strong this week, specially since the US manufacturing numbers were showing good growth. The dollar heaved a bit higher and the bond yields also moved up.

On Tuesday, the NASDAQ finished at a 17 month high, after a string of upbeat analyst comments, while the S&P and DOW moved up on good reports from the ISM index, from 51.8 per cent in July to 54.7 per cent in August. The pace of job cuts has reduced as well, so the economic news is definitely picking up. Wednesday was a good day across the world, and trading was one of the heaviest in recent times on the NYSE and NASDAQ.

The Dow closed at 9568 and NASDAQ composite at 1852, following from upbeat remarks from Cisco systems and analyst comments. On the other hand, euroland economic woes meant that the Euro took a rather bad beating indeed by dropping to $1.0765 before recovering to close at $1.0841. London (up 1.4%) and Europe (up 1.6%) did well, running off their legs after good tech news.

Mind you, the general economic woes are still bad in Europe. All the US markets were well on their yearly highs on Thursday's trading session, running off a spurt in factory orders and increased productivity growth, although the market shrugged off rather bad jobless claims data. On Friday, the markets took a deep dive off bad job numbers and the DOW closed at 9503, down 85 points, the NASDAQ down 11 at 1858 and the S&P down 7 at 1021.

The International Labour Organisation confirmed what the markets have known for a long time, that the US productivity is far higher than Europe and Japan, and actually accelerated in 2003. Then people wonder why the US does so well.

I quote: "The KILM findings show that growth in productivity per person worldwide accelerated from 1.5 per cent during the first half of the 1990s to 1.9 per cent in the second half. Most of this growth was concentrated in industrialised economies (the United States and some European Union countries), and some in Asia (China, India, Pakistan and Thailand)."

Talking about labour productivity, another clanger was dropped. The CBI released a report moaning about the EU regulations, which will give temporary workers far more rights than previously known. This will make them far more expensive and needless to say, flexibility will be lost. UK, which tried its level best to make its economy flexible to changing needs, may now well be seeing a rise in the structural unemployment, which bedevils the moribund European economies.

John Snow, US Treasury Secretary, managed to get the Chinese to commit to an eventual abandonment of its fixed exchange rate policy. There was no deadline given, so do not expect anything to happen for some major time yet.
As usual, the US is trying to get China to revalue their exchange rate up and given the state of the Chinese banking market, it may well have the opposite effect of devaluing the Yuan. That should be fun!

The Saudi Government moved a step closer to joining the WTO by signing a landmark agreement with the European Union, which leaves only the US negotiations pending. Once this is over, then the country can join the WTO. It will not really make much of a difference, since the kingdom's trading is so heavily skewed towards its petrochemical industry, leaving the rest of the trading sectors insignificant comparatively. Regardless, the petrochemical industry is outside the WTO ambit anyway! The famously impenetrable Kingdom's workings will have to be transparent and clean. Corruption and commissions will have to be reduced, it is a tall order and I am not sure whether the Kingdom's managers have really thought about how it will impact the kingdom.

The WTO bandwagon is trundling on. It turns out that the lesser developed countries are going to have special benefits with respect to trading rules, realising their inability to fully link into the global trading regime. I am not very sure whether this is good, this may well be the thin end of the wedge.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)

First Published: Oct 06, 2003 18:35 IST