The Indian Rupee has risen 8% in value this year and is now Asia’s strongest currency against the US dollar. As always, strength is a double edged sword however. Indian companies that have large foreign currency borrowings are finding their debt repayments cost less, and the State oil industry and airlines are also well poised to take advantage of this - a point not lost on the national treasury and it’s aviation regulators. They have just reduced from a five year qualifying period to three the required time in business a domestic airline must have been operational before it qualifies for the lucrative international routes. And potential domestic mergers there - and in particular between Jet and Kingfisher - can have their cake and eat it too as the debt financing risk is reduced and India gets more planes in air coupled with more direct global trading routes.

However, not everyone is happy. Indias diamond trade, long a benchmark industry, is feeling the pinch. Made up mainly of medium sized companies, currency hedging for them is a more expensive proposition, while the Indian petroleum business, limited to just a handful of major players, has greater ability to spread risk due to the larger amounts of capital it collectively has at it’s diposal - one of the reasons it has overtaken diamonds as India’s largest export earner in the past two years.

The Reserve Bank of India - the regulator in all of this, has played its hand conservatively, especially being worried about inflation, and has hiked interest rates five times already this year to try and curb it. It’s also been buying dollars - $USD20 billion so far in 2007 to try and stem the rise of the rupee - although the currency still kept climbing. However, the Ministry of Finance has subsequently stepped in to reduce liquidity - banning the remittance of forex in margins trades in overseas exchanges and adjusting monetary policies to allow greater outflow of funds. Capital controls have also been mentioned as a possible move to head off the spectre of inflation.

Essentially however the RBI sees a soft landing for the rupee, by letting it be more exposed to the vagaries of market demand. This could mean however extensive damage - exports being hit, while cheaper imports harm developing domestic industries, only recently themselves free from the old shackles of inter-State market protectionism. Cheap Chinese goods replacing cheap Indian ones is not a political or patriotic problem the nation is ready for right now.

Whichever, although the rupee sits in a partially eviable position as top dog in Asia - its government, like the Chinese before them just north of the Himalayas, need to adopt strict measures to curb the overheating economy and allow development without too many bumps. 2007 & 2008 are the years when they will be put to the test - and with an Indian Presidential election just about due - a sustainable and prudent economic policy will be high on the list of business voter concerns.

Local traders and governments of both sides of the China-India border have described the recently re-opened Nathu La Pass, the ancient trade route between the two countries, as having a “disappointing” impact on any meaningful trade in its first recent year of operations.

The pass, one of the worlds highest roads, was reopened just over a year ago on July 6th 2006 after intense lobbying by both governments, having been closed since the India-China border war in 1962. Currently, agreements between the two nations limit trade across the pass to the export of 29 types of goods from India and import of 15 from the Chinese side. Exports from India include agricultural implements, blankets, copper products, clothes, cycles, coffee, tea, barley, rice, flour, dry fruits, vegetables, vegetable oil, molasses and candy, tobacco, snuff, spices, shoes, kerosene oil, stationery, utensils, wheat, liquor, milk processed product, canned food, cigarettes, local herb, palm oil and hardware. Chinese exports to India include goat skin, sheep skin, wool, raw silk, yak tail, yak hair, china clay, borax, butter, common salt, horses, goats, and sheep. Restrictions are also placed on traders, with permits only given to those who were Sikkimese citizens before the kingdom merged with India in 1975.

The opening also shortens the travel distance to important Hindu and Buddhist pilgrimage sites in the region, a source of comfort to many locals in the region who had been cut off from relatives and ancestral places of worship for over forty years.

The two sides also decided to open two border trade markets - the Renqinggang market in Yadong and Changgu Mart in Sikkim, which the two countries have agreed will be open between June and September every year. “But figures show that the border trade has been uninspiring since the re-opening,” head of the customs of Lhasa, capital of southwest China’s Tibet autonomous region, Zhang Weidong commented.

China’s Renqinggang market received 574 Indian traders last year while 1,217 Chinese traders went to India’s Changgu Mart during the period, statistics from the Commerce Bureau of Yadong county said. The total trade volume for the year reached about 1.49 million yuan (196,000 US dollars), including 1.04 million yuan of exports and 450,000 yuan of imports, noted the Tibet Regional Commerce Department.

Only 11 motor vehicles and 56 traders from the Chinese side went through the pass and 12 motor vehicles and 38 traders from the Indian side crossed the pass on July 2, which was nevertheless described as “the busiest” day by local officials since the re-opening.

A senior official in Tibet said just a month after the re-opening of the pass that the trade was running at a “low level” and was “not ideal” because “India has unilaterally imposed restrictions on trade through Nathu La.”

In a move to change the situation, the two sides have agreed that the trade through the pass this year should begin a month earlier (from May 1) than last year and will continue until November 30 compared with last year’s September 28. These restrictions, largely enforced by the winter months, have nonetheless been welcomed by local businessmen.

“The re-opening of the Pass and the trade volume achieved within just a year are at least a good start for the two sides, considering the trade route had once been closed down for 44 years,” said Gao Shangde, deputy director of the Tibet regional commerce department.

He said Indian commerce authorities and Sikkim state are upgrading the roads leading to the border trade mart and the infrastructure of the mart in an effort to boost trade. “We still need time for growth of border trade.”

Before the pass was opened, almost all the Indo-China trade went through the port of Tianjin more than 4,000 km (2,500 mi) away. With the opening, this distance has been shortened to 1,200 km (745 mi). Trade volumes through the pass had been expected to to grow to Rs. 206 crore (US$ 44.6 million) by 2007, and Rs. 12,203 crore (US$ 2.6 billion) by 2015. However, the reality has fallen woefully short, mainly it is felt on Indian nervousness about allowing Sinification of an area that is close to still disputed territories. While the road on the Chinese side is well maintained and tarmac’d, the Indian side of the pass is still undeveloped and requires specific military endorsed permission to enter.

But despite it’s apparent quaintness as a relic of the silk road, there are some serious aspirations about the Nathu La Pass. It offers the Chinese access to the port of Kolkata (Calcutta), situated about 1,100 km (700 mi) from Lhasa, for transshipments to and from Tibet, and it is that aspect of trade that had led to the initial predictions of millions of dollars worth of trade passing through. Tourism is also off the map for the present - tourists not being expected to receive permits to cross the border until 2012.

Quite what the future holds is uncertain. But for now, the opening of the Nathu La Pass seems more a gesture of the ‘re-engagement’ of China and India than a serious attempt at reviving an old trade route.

However the Indian locals are restless. “My family have traded wool with Tibet for centuries” cries one old woman to 2point6billion. “Yet even with all the new roads and government talking I still can’t get so much as a yak tail across while the Chinese can”. as she too airs her grievances already at the perceived trade imbalances and unjust nature of the two sides only being permitted to trade specific goods.

But the Chinese aren’t giving up yet on resurrecting the pass. On the Tibetan side, two highways—from Kangmar to Yadong, and from Yadong to Nathu La — were listed in the 2006 construction plans of the Ministry of Transportation and the Development and Reform Commission of China and are now under construction. Plans are also underway to start a bus service from Gangtok to Lhasa, and to extend the Qinghai-Tibet Railway to Yadong over the next decade. Tibetan traders and Chinese merchants may well see their shipments off at Kolkata yet.

“It’s been 44 years” says one Tibetan trader we saw “Another four or five won’t make much more difference as the two local governments get to communicate and understand each other more. India needs the Chinese trade and Kolkata needs the shipping business. It’s the only thing that can rescue that huge old port after the collapse of the Jute trade with Bangladesh. Kolkata needs new trade and the Nathu La Pass can give it that. It’s only a matter of time. And then maybe we Tibetans can trade again with India as we always have done instead of the Chinese taking it all from us”.

Further Reading: China Expat, Magazine “Chinas Trade Routes With India” April 2007 at www.chinaexpat.com

According to news from the China Securities Regulatory Commission (CSRC), China is now willing to allow foreign bourses to establish Representative Offices in China. Not just limited to Indian exchanges, a global scramble is expected as some of the worlds biggest exchanges are expected to want a piece of the action, as China antipates some USD100 million being placed by Chinese companies in overseas markets. There are qualifying procedures. Other regulatory regimes are expected to sign an MOU with the CSRC which includes the sharing of cross-border investment data and transactions, and that such Representative Office must be from respected exchanges “with sound operational and financial conditions existing for ten years or more”. Likewise, the Chief Representatives of such offices must have a “minimum of three years experience in handling matters related to China within the past five years” and “possess knowledge of China’s financial laws and regulations”, although exactly how this is deemed a qualification is not clear. Tipsters from your local barfly would appear to enable him to fall into the melting pot for qualified personnel.

A typical lack of clarification and implementing rules from China’s regulatory bodies aside, it does mean that India’s Stock Exchanges are poised to open up Representation in China. Indeed, the Securities & Exchange Board of India has signed off on a CSRC MOU, and the National Stock Exchange and main Bombay Stock Exchange, as well as the smaller bourses in Delhi and Kolkota are expected to apply.

Such offices are to be restricted to marketing, and only to focus their promotional activities to business enterprises and not Chinese individuals. Public advertising will also be banned.

Sensex closed at an all time high of 15,039 last evening. We present to you a timeline of the Sensex story since it’s inception.

Established in 1875 as “The Native Share & Stock Brokers Association”, Bombay Stock Exchange is India’s first stock exchange to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956. Since 2005 BSE (earlier an Association of Persons) is a demutualised and corporatised entity incorporated under the provisions of the Indian Companies Act, 1956 and is now called the Bombay Stock Exchange Limited.

The bench mark index on the BSE is Sensex and is tracked worldwide. Sensex, the Sensitivity Index, is a basket of 30 constituent stocks representing large and liquid companies. First compiled in 1986 was calculated on a “Market Capitalization-Weighted” methodology. Now it’s the “Free-Float Market Capitalization-Weighted” method being used wherein the level of index indicates the Free-float market value of 30 stocks comprised in the basket relative to a base period. The base year of Sensex is 1978-79 and the base value is 100.

Lets have a look at the journey of Sensex from 1000 to 15,000 points (Source: www.rediff.com)

Analysts in India, including the big brokers feel that Sensex will cross 25,000 mark by 2010, a figure which was well predicted in 2005 itself. Morgan Stanley bank predicts its surge to 50,000 in 2020 and this seems quite possible with Brazil’s Sao Paulo Stock Exchange’s benchmark index Bovespa hitting 50,000 mark first time ever on May 3rd this year.

BSE in the picture above (source: www.india-picture.com) is located on the Dalal street in Mumbai. Dalal in Hindi means a broker.

The much anticipated India Briefing magazine and website was launched yesterday in Delhi by the consulting practice Dezan Shira & Associates. The firm, which has  published the well known sister publication China Briefing and a variety of books over the past eight years in China, has recently opened three India offices and is positioning itself as a Foreign Direct Investment boutique legal / tax practice specializing in China and India investments on behalf of international businesses, mainly in the manufacturing sector.

Chris Devonshire-Ellis, the firm’s founder and senior partner, commented “The launch of our new Indian business series demonstrates our commitment to the development of foreign direct investment into India and represents a significant investment by our practice in the future of India. Like China Briefing has for China, we hope that India Briefing will assist with educating the international business community concerning the legal and tax environment in India and will help facilitate trade into the country.”

India Briefing is a monthly magazine, and can be subscribed to on a complimentary basis. With an international readership, subscribers are sent the pdf full color link each month directly to their mailbox. Subscribers also receive access to all archived back issues as well as invitations to specific business events and book offers and discounts.

“We’ve found this works well” says Devonshire-Ellis. “It shows the global business community the strength of Dezan Shira & Associates as a practice, and demonstrates our professional legal and tax knowledge in a manner which is also educational. We’re not in a position of the global firms and Big Four and be fed business from corporate offices overseas, so we have to show our abilities via marketing and education. Both India Briefing & China Briefing are designed to do just that.”

India Briefing’s first issue deals with expatriate individual income tax in India and can be accessed here.

China Briefing can be accessed here

Dezan Shira & Associates can be accessed here

Demand For India’s Free Trade Zones Heats Up
Foreign Investors Piling In As Zone Owners / Operators

The development nationally of India’s Free Trade Zones has heated up spectacularly as both domestic and international property development companies have taken advantage of generous tax breaks to help get private sector funding into the development of foreign direct investment into India. These breaks, which can halve the domestic tax rate, and defer much of it for up to ten years - are specifically designed to alleviate government burden in developing zones themselves – in sharp contrast to China, where private development of zones is still a rarity. At the ASSOCHAM meeting on development zones last Friday in Delhi, it emerged that some 800 projects are currently completed or awaiting development in India – the vast majority of these being private sector developments.

This has occasionally led to clashes, sometimes violent, with dispossessed locals and farmers apparently being forced off some land, with riots having broken out on a few occasions. Sound familiar ? Moves to bring local businesses and farmers into the free trade zone ventures as minority partners in order for them to continue to profit from the land use have been touted as an alternative – something again that China’s local governments – some of whom, in collusion with property developers there have stripped peasant farmers of everything - could probably learn from.

However, it’s private equity that is leading the way in terms of spending on necessary infrastructure, technology and know-how. Many of India’s largest private companies and families are now involved in getting the concept of Indian Free Trade Zones off the ground, again taking much of the financial burden off the government from doing so, and thus helping deflect criticism that government spending should be focused on much-needed rural education, water supply and basic health care than big business. There in lies the difference between the economic revolutions in China and India – China’s was government driven, lead by foreign direct investment, while India’s is funded by it’s own domestic private wealth.

For the foreign investor wishing to manufacture in India, Free Trade Zones offer an attractive alternative to India’s still rather high corporate income tax rate of @34%. Effective ten year tax breaks, at five years zero and five years 50% tax are making India a favored destination for international manufacturers, with such rates outstripping the benefits that China has offered. Additionally, as 2point6billion reported last week, India’s wages are significantly lower – a trend that is going to remain constant as China’s workforce ages.

For comparisons between Chinese and Indian Free Trade & Development Zones, Sheetal Guliani at the India Desk of Dezan Shira & Associates is there to assist.

Numbers:(”2069″,”840″,” US$ per head”, “CIA World Factbook”)

This is the fifth consecutive year of the double digit growth for China, while Chinese economy grew at 11.1% in the first quarter of 2007, India’s GDP followed closely at 9.1%.

Indians would be surprised to know that many factories in China pay workers as much as US $ 2.50 an hr. In India many educated people don’t make that in a day.  The figures from last year’s Mercer survey (below) support this. Production workers in China are earning more than those in India. 

AVERAGE ANNUAL PAY-CHINA (in British Sterling)

Project manager: £12,173
Software engineer: £6,998
Accountant: £4,677
Sales rep: £2,649
Production worker: £1,214

AVERAGE ANNUAL PAY-INDIA (in British Sterling)

Project manager: £5,220
Software engineer: £5,344
Accountant: £2,956
Sales rep: £2,464
Production worker: £964

(Source: Mercer Human Resource Consulting, Survey, 2006)

Why the disparity? One reason may be China’s shortening supply of laborers. 

“China has been shifting from an era of excessive labor power to a labor power shortage, with its turning point likely to occur in the 11th Five-Year Plan (2006-2010) period and, to be specific, it could be in 2009″ (People’s Daily, May 14, 2007).

This trend will contribute to significant changes in China’s economy which is centered around manufacturing and exports.  Not incidently, help drive China’s growth away from labor intensive growth and up the value chain. 

Alternatively, what if China were able to increase its labor supply? The new, but historic, silk road passasge between China & India, the Nathu La Pass may possibly provide China with a new source of migrant workers: workers from India!

Additionally, the previous post titled “White-collar salaries rising faster in China, India than in West” gives good insight into the pay increases in India and China vis a vis the west. Enjoy!

In running around looking at what’s what in India, we found an interesting report from the India section of SeekingAlpha by Howard Scott concerning the development of the Indian economy.

Scott writes:

India’s rupee rose, in the biggest quarterly gain in 3 1/2 decades, as the world’s second-fastest pace of economic growth and a $1 trillion stock market attracted overseas investors. The currency gained 6.8 percent this quarter as the government allowed the rupee to advance to make imports cheaper. India’s current account showed a surplus, for the first time in a year, in the three months through March, as software exports increased and oil imports slowed, a report showed yesterday.

Commerce and Industry Minister Kamal Nath expects that foreign investment may double to $30 billion this fiscal year and India’s 300 million strong middle class are buying more imported goods. Share sales may double this year to an all-time high, buoyed by demand from investors attracted by the fastest pace of growth in almost two decades, JPMorgan Chase & Co. said. (more…)

ASSOCHAM Event in New Delhi – Special Economic Zones

Friday, 6th July – Hotel Oberoi, New Delhi

Chinese & Indian SEZs Discussed

ASSOCHAM, the largest Indian Chamber of Commerce, is holding a special forum concerning Special Economic Zones this coming Friday, at the Hotel Oberoi in New Delhi. Presided over by ASSOCHAM President V.N. Dhoot, who is also the Chairman of Videocon Group, the theme at this event is the development of both Indian and Chinese SEZs, with guest including the Executive Vice Mayor of Shenzhen, Liu Yingli, also speaking. Shenzhen city, in South China close to Hong Kong, is China’s largest SEZ. Still on the China theme, Chris Devonshire-Ellis, Senior Partner of Dezan Shira & Associates, the China-India FDI advisory practice will present on Chinese SEZs, Free Trade Zones, and compare these with India’s, in particular from the tax incentive perspective as well as from permitted and encouraged industries in both countries. Comments on China’s reduction in VAT rebates upon export will also be made. India’s Commerce Secretary, Mr. G.K. Pillai, will also address the forum, with other speakers including Mr. LB Singhal, Director General of the Export Promotion Council, Mr. Nahveen Raheja, Co-Chair, SEZ Council of India, Dr. K.K. Jajodia, Chairman, Assam Co; and many other experienced panelists and guests.

A summary of the event will be posted here on 2point6billion.com directly after the event.

To attend, please contact ASSOCHAM or visit their website.