A dollop for manufacturing?

The government is going all out to woo investments in the manufacturing business. First, it was a policy to promote petroleum and petrochemical units by creating Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs).

Now, it is planning to extend it to the entire manufacturing sector, by setting up mega manufacturing hubs. Manufacturing Investment Regions (MIRs), as they will be called, will be specifically designated zones over an area of 250 square km each for domestic and export-led production along with associated services and infrastructure.

The government plans to ensure a minimum processing area about 40 per cent of the total designated area. Just as in the case of the SEZs, the policy envisages that the hubs or zones will be built and managed by a developer or a group of developers, while external linkages will be provided by the Centre and the state government concerned.

The government is looking to get the concept cleared by the Cabinet at the earliest so that it can be clubbed with the Delhi-Mumbai industrial corridor, work on which is expected to commence in 2008. But with the PCPIRs not making waves as projected and the SEZS still stuck because of the land allotment disputes, the idea as of now might just be another mega announcement.

P-NOTES FACE DEMISE

In a bid to discourage the use of Participatory Notes (P-Notes) and, in turn, bring about greater transparency in the capital markets, SEBI and the government have decided to permit foreign individuals, companies and other investors such as hedge funds to register directly as Foreign Institutional Investors.

A significant proportion of portfolio inflows into the country have been through the PNote route. However, regulatory bodies like SEBI and RBI have been concerned about the misuse of the instrument—it is felt that many overseas investors use this route to conceal their identities.

This proposed move could face opposition from the RBI as it is already finding it difficult to manage the significant capital flows into the country.

By Rishi Joshi

AIR WAVES GET STUCK

In a new twist to the ongoing controversy over allocation of spectrum, Union Telecom Minister A. Raja has returned all 16 applications for spectrum allocation, both from existing and new players, deciding, instead, that several committees will be set up to look into issues raised by both the GSM and CDMA camps.

This comes in the wake of the CDMA lobby objecting to the GSM lobby’s demand for more spectrum on the grounds of subscriber benchmarks.

The CDMA players, in fact, allege that the GSM operators have already been allocated more spectrum than they need and have demanded a probe into it.

Meanwhile, following a division within its own ranks, the Telecom Regulatory Authority of India (TRAI) has delayed its proposed recommendations on the capping of telecom service providers and other licensing regulations, citing the “complexity” of the issues involved.

By Aman Malik

LOOSEN UP, RBI

Handling success is sometimes more difficult than handling failure. The same holds true for economic growth as well. This predicament has now visited the government more than ever before, as the latest statistics indicate that the Gross Domestic Product (GDP) growth during 2006-07 could well kiss the double digit mark. Currently, the estimate stands at 9.4 per cent.

The question then is: what does it take to sustain this growth trend? News reports indicate that the growth nudge is coming from the best as well as the worst performers—manufacturing and agriculture. This is heartening, since both sectors now enjoy the attention of policy makers in the Capital —measures are afoot to create manufacturing hubs across the country and a policy to kickstart a second Green Revolution is also on the anvil.

While the real sector issues are being addressed proactively, is the monetary policy geared for this growth trajectory? Not entirely. Here’s why: the central bank’s conservative approach towards the financial markets could well now turn out to be restrictive. Consider a key preoccupation: control of money supply in the financial system.

Money supply growth has stoked inflation, since production is not keeping pace with demand. However, it has successfully tamed inflation, measured as a function of the wholesale price index. A few months ago, it was hovering around 6 per cent. Today, it is tamed, below the 4.5 per cent mark. Good for the consumer. But what about the industry that requires competitively priced funds?

RBI’s money supply outlook for the year allows for a 17 per cent growth, while supply growth is well over 21 per cent. Interest rates, however, have been on the rise, compounded by the government’s move (on RBI’s advice) to curb the domestic industry’s overseas borrowing programme.

On the other hand, there is no denying that growth in the manufacturing sector is beginning to have its salutary effect—as assets are being created, production is better coping with demand, and to that extent calming the inflationary fires. Moreover, the quality of foreign capital flows into the country could well be better this year from the point of view of inflation management.

Last year, a sizeable part of the FDI inflow was towards M&A activity and not for setting up of manufacturing facilities—to this extent, it increased money supply in the financial system. That happened because the domestic promoters cashed out and parked a good part of their money in the domestic banking system rather than in creating new assets.

In this backdrop, should RBI not loosen its grip on the money supply and raise its outlook? It is a fact that as we economically integrate with the world, distortions in other economies will manifest in a viral manner. We felt the recent ripples of the subprime mortgage fiasco in the US involving under-priced risky mortgage assets. However, that is no reason for diffidence as long as manufacturing and agriculture, the two pillars of India’s growth story, keep chugging along nicely.

By Balaji Chandramouli