Trade Wars which could be a boon for India

The article which appeared in Free Press Journal

Trade Wars could be a boon for India

written by R Kannan December 15, 2018 08:22 AM

The Article appeared in the Free Press Journal Mumbai

The trade war between US and China has created  a turbulence in the global affairs  and  the  trade between nations will undergo a change if the issues between two nations are not resolved soon. In the month of November, US had the highest trade deficit with China. The two countries so far imposed tariffs on $ 360 bn of merchandise trade between them.

US-China trade war will have an adverse effect on many economies which are depending on trade and it will distort the trade flows between countries. The war is likely to push the production to more expensive locations which will lead to price rise and reduced efficiency. Global trade growth  will take a beating, existing global supply chains will be disrupted and investor confidence will dampen. There are two opposite views on What US will do once  the year 2019 dawns. It will go ahead with the proposals and start implementing them. Other view is that, once we come closer to 2019, US could change its stand and moderate the proposals.

While, many countries will be affected by the Global trade war, few countries, will also be winners in this scenario. US and China will explore options for suppliers from other countries to fulfil their demand. They will develop alternate markets for their products and seek new sources to meet their local demand.

The countries which are likely to benefit include, Mexico (auto exports to US will increase), Europe (can export more agricultural produce to China) and many of the Asian countries , especially ,India, Malaysia, Vietnam, Indonesia, Thailand, Sri Lanka, Pakistan, Cambodia, Myanmar can explore the opportunities to increase their exports.

India can focus on increasing the exports from ICT, Automotive, Apparel and Readymade sectors. ICT is one sector, where US government has increased the tariff for imports from China. This is the largest category of imports from China and it amounted to $ 150 bn a year. This will help to hamper the China initiative of Made in China 2025 , which is focussed on increasing the growth of the hi tech sectors in China. India witnessed a phenomenal growth in mobile penetration and other related ICT sectors in the last few years. India had come out with a policy of Hardware manufacturing and few large players, especially in mobile phones had announced their plans for big investment in this sector. India has a very good eco system for hardware development and this could be a good opportunity for India to increase the growth of hardware Industry. The initiatives in India like Make in India, Industry 4.0, will make India attractive for foreign companies to make the investments here.

Automotives. China exported finished vehicles of US $ 7.2 bn. But exports of Auto components from China was at $ 31 bn in 2017. US was the main destination for Auto component exports from China.  This is likely to affect the Chinese exporters. China Imported Finished  Vehicle exports to the tune of US $ 10.3 bn. But most of the brands exported to China, have their local presence in China. Auto components is a very big opportunity. In the last few years, India has become very competitive in Auto sector and emerged as the most preferred location for manufacturing small cars in the world. Further, the Eco system for Auto sector in India is well developed. All the players in the market invest on innovation , R&D and produce global quality vehicles today. Further, the FDI regulations for this sector are very liberal. Indian Auto and Auto component manufacturers can capitalise on this emerging opportunity.

Apparel and readymade Garments. China is the leading producer today and they exported $ 38.7 bn to US in 2017. In 2016, China  had 36.2% of global textile exports and 34.5% of global clothing exports.  The new tariffs by US government , will create significant opportunities for other countries who are leading exporters in the world.  Bangladesh and Vietnam rank second and third in world in exports. But India has the raw material , cotton and  a vibrant Industry. At present, high quality yarns from other countries are not allowed to be imported into India. If India relaxes , this norm, India can move higher up in the value chain and aspire to become the second largest exporter in the world.

India can fill the void of exports from US to China. This will be mainly in the area of agriculture and we can grow crops which are suited to Chinas’ requirements and ensure China continues to buy cotton from us  and start importing other agricultural produce. This will also help in achieving the objective of doubling farmers income and increasing the productivity in agriculture. India has a very huge trade deficit with China. By promoting Agri Exports, the trade deficit with China could be reduced.

By focussing on these sectors, India would be able to significantly increase its exports and it will also aid in  achieving the export targets set by the Government and reduce the trade deficit. The more investment friendly / export friendly policies could be drawn up in these sectors , keeping the export markets as the focus. This is the right time for India to accelerate the development of these sectors.

R Kannan is Head, Corporate Performance Management, Hinduja Group. The views are personal.

Brexit Concerns - The way forward

The article which appeared in Free Press Journal

Brexit concerns: The way forward

written by R Kannan January 3, 2019 8:33 am

When the Brexit referendum was put to vote in UK, the general expectation was that it would remain in the EU. In the June 23, 2016 referendum, 17.4 million voters, 52 per cent, backed Brexit ,while 16.1 million, 48 per cent, backed staying in the union. The difference was only 4% of voters, 1.3 million. Since the time available for Brexit was 21 months from the date of referendum, the UK government was hopeful that before the period gets over, they would be able to strike a deal for post Brexit scenario with EU and other members countries and the Brexit process would be smooth, less painful and could be achieved in a least effort with least cost. After the result of referendum was out, it created ripples in UK. Looking at the thin margin, many felt that , Brexit would be bad for the UK Economy. There were also talks that second referendum should be conducted, since the margin was thin and for a event which would have significant impact for all the stakeholders, it was better to reconfirm the mood of people again before going ahead with such a big economic reform. By end of December 2018, the post Brexit deal is yet to be reached. This has created a lot of uncertainty in the minds of all the stakeholders and will have significant short term impact on the UK economy. Closer to the implementation date, it emerges that there are many issues relating to immigration, trade barriers, cost of doing business, logistics, hospitality, business competitiveness and the need to add many new departments and functions in various government departments with huge financial outlays. Further, it has created a turbulence in terms of future of businesses, employees and the economic growth. Brexit decision is a unilateral decision.

The ECJ, in its recent statement, opined that since UK decided to exit EU on its own, till the post Brexit agreements are in place and the date of Brexit arrives, UK still has the discretion to withdraw from Brexit. Of course, UK has to go through the governance procedures, indicating that it could go through the process of parliamentary vote or any other procedure including a new referendum which would allow UK to withdraw from its proposal to exit EU. As the dead line nears, the expert predictions also indicate that the Probability of UK remaining in the EU has increased. There is an increased concern and wish that UK withdraws from the process of Brexit. Considering the fact that UKs trade with Europe amounts to 49% of its total trade, Brexit is likely to increase the cost of trade in terms of additional procedures, transport delays, additional levies and reducing the ease of doing business. Today many countries are focussing on liberalising the trade and set a goal to move towards higher rank in ease of doing business.

In 2009, the ease of doing business rank of UK was at 5 and it slided to 9 by the year 2018. If Brexit is brought in effect, UKs rank is likely to slide down further. Brexit will increase the trade barriers. To reduce the impact of the barriers, the efforts should be to remove tariffs and eliminate non-tariff barriers to trade. The assumption behind Brexit is that this would happen, which will not be true when it comes to the implementation. When various expert studies predicted the loss of economic output, one of the main reasons highlighted in those studies was the presence of new trade barriers.

Brexit will reduce FDI. Of the total FDI in UK, in Jan 2018, 42.6% of the investments were from EU and from the companies which have strong ties with the UK. After the Brexit, the cross border trade will reduce, thereby reducing the attractiveness of investments by EU companies in UK. Brexit will have impact on availability of skilled employees. As of now, there are one million Britons living in EU and 3.5 million citizens living in UK. EU has made a provision for UK nationals to remain in EU and have introduced a scheme for them to stay in EU. But it is unclear what will happen to 3.5 million from EU who are living in UK. Even UK nationals have started registering for citizenship in other countries to avoid the uncertainty. After the Brexit, it is not clear how the dynamics will work out. If EU citizens leave the country, it will create a big gap in skills required. This will also impact the productivity of the economy. The relationship of UK with other EU countries will undergo a big change.

At the same time, UK will have opportunities to consider other partners to expand its trade, especially from Asia, the countries like; India, China, Malaysia, Vietnam, and Thailand. The predictions by various experts on the post Brexit Scenario, project that there could be an economic output gain of 7% to Economic output loss of 18%. Reduce the ease of doing business and reinstating the barriers to trade is bound to reduce the economic output for both UK and EU. According to various experts, to assess , whether the Brexit is good or bad, there is a need to make the assumptions made for going for the Brexit vote transparent to every one.

While putting to vote, the action plans identified for how the migration would be handled has to be discussed in detail. The post Brexit predictions by UK government includes, the incremental growth , which will accrue to the UK economy through non – Brexit policy related actions. While looking at the post Brexit scenario, the effect of non Brexit policy related actions on economic growth should be separated, so as to understand the real effect of Brexit on the future of UK economic growth. In this world of VUCA, Brexit can have a negative effect on the UK and European economies. Whereas the scope for achieving a very high economic growth through Brexit is very limited. Further, most of the European economies are growing at the rate of 1 to 2 % and introducing a new uncertainty will debilitate Europe when there are other factors like trade wars and withdrawal of Stimulus by US and Europe.

In the light of this, the following options could be looked at in resolving this issue. The government can take measures including , putting the proposal to vote in the parliament, conducting a second referendum or adopt any other procedure as per the UK legislation, which allows the withdrawal of the proposal to made to EU. This will help to maintain the status quo, removing all the uncertainties for both UK and the EU. Till now, no deal has been arrived at and there is an immediate need to decide on the way forward from March 2019. To reduce the impact of no deal, which is likely to be very costly for the UK economy, in the event of deciding to proceed with Brexit,the following options could be looked at. Send a proposal to EU to extend the time period of Brexit by another six months to one year, go with the Brexit and allow the present arrangements to continue for six months to one year, enter into agreements with each individual member country of EU, where the agreement is similar to, mirror image of the one signed by UK to be part of the EU. By considering the above options, UK should be able to come out of the short term uncertainty and will have time to look at all the options which will ensure the continued competitiveness of UK economy and its long-term stable future.

https://www.freepressjournal.in/analysis/brexit-concerns-the-way-forward/1428351

R Kanan is the Head of Corporate Performance Monitoring and Research, Hinduja Group. (Views are personal).

3rd Millennium – Opportunities, Issues and Challenges R.Kannan , Hinduja Group International Research Conference conducted by Indian Accounting Association, University of Mumbai and Chadrabhan Sharma College on 7th April 2018 . Hon’ble Member of Parliament, Shri Dr. Kirit Somaiyaji, Prof.Shiware, Prof Chitra Natarajan, Prof. Ashok Joshi, Prof. Madhu Nair, Prof Pratima Singh, Members of Indian Accounting Association, Faculty Members and Researchers from all over the world , Ladies and Gentlemen, Good morning to all of you. I am very happy to be part of the 4th International Multi-Disciplinary Conference on Transition and the Transformation in 3rd millennium. I would like to thank Prof.Shiware and Prof.Chitra for inviting me to deliver the key note address. I am happy to know that in this conference, research papers relating to: i) Strategic Marketing and Planning ii) Business Ethics iii) CSR iv) Global Management v) HRM vi) Digital Strategies vii) Innovation viii) Empowering Women ix) Telecommunication, etc Will be presented. It is very heartening to note that more than 400 research papers were received from various parts of the world and am happy to see , many dignitaries have come from abroad to attend this conference. Am sure with these wide variety of subjects and perspectives, the participants including me will benefit a lot from the proceedings. The topic today is of utmost relevance in the context of continued disruptions and uncertainty in the Economy. The advancements in the first 17 years of the 3rd millennium are breath taking. We are living in an age where continued disruption, uncertainty, volatility, complexity and ambiguity are part of our daily life. The advancement in recent past is much larger than the advancement witnessed in the earlier few thousand years in the past. Few hundred years ago China and India were the leading economics in the world. According to some sources, both countries had more than 50% of the world’s GDP. Later when Britain started expanding its operations globally, it became the leading economy in the world. Technology revolution catapulted USA to the leading position in the world. Afterwards, we witnessed the rise of Europe, Russia, Japan and South Korea. From 1980 onwards, China started growing fast and India started reporting higher growth after liberalisation. Then we started hearing Acronyms like BRICS, MENA, CIVET, etc. In 1980 , China and India were of the same size . The breath taking reforms undertaken by China and the fast growth it was able to sustain for many years have made China , a global power today. US and Europe and countries like Japan, Singapore and Hong Kong were contributing to the growth a few years ago. Even today, because of its large size, US contribution to the Incremental economic growth in the world is substantial. Since the growth potential in these countries have become less, the countries like China, India, Indonesia, Middle East and Arica have started growing fast. According to predictions for 2050 by various experts, China will be the leading economy with a GDP of about $ 50 trillion, followed by US at $ 36 to 40 trn and India $ 27 to 30 trn. Indonesia will be the fourth largest economy in the world. In the next 2/3 years, India will become the country with the maximum population in the world. It has the largest number of youth in the world. The largest number of entrepreneurs in the world are living in India. We create the maximum number of entrepreneurs in a year in the world. As per the forecast by all the leading financial institutions and Economists through out world, India will continue to grow at a rate of more than 7% p.a. for many more years. The high growth will create many opportunities for people from across the society. The path to the growth is paved with lot of challenges. Indian society had gone through a fast transformation in the last few years. From total dependence on Agriculture and rural areas, the growth has shifted to services, manufacturing and cities. Despite, the level of urbanisation is only at 32%, what we find today is that lot of developments taking place in villages also. They are being provided with electricity, water, road connectivity, media and digital connectivity. The penetration of mobile phones in rural areas is taking information to every nook and corner of the country. The concept of joint family is giving way to nuclear families. In a family, many go to work, resulting in multiple income and high earning capacity. People have started spending money and India has become one of the high consumption economies in the world today. The entry of e-commerce players has increased the consumption level. Unlike in the past, today people spend lot of money on Education, Health , Leisure, Entertainment and Travel. In an Economic Growth model, the growth of an economy is initially dominated by Agriculture and then manufacturing picks up. Finally, the services takes the dominant position. In the case of India, even without creating a big manufacturing base, the initial fast growth was supported by services. As the services grew, it gained its share from Agriculture in proportion to the lost share of Agriculture. Whereas the share of industry and manufacturing remained at the same level for many years. The fast growth in services was mainly supported by Trade. India has got one of the largest and deepest Retail systems in the world. There are six levels of trade before it reaches the final customer. At the retail level itself there are more than 15 million establishments. If we take the other six levels, it adds up to a lot in terms of number of entrepreneurs. This has created lot of business and entrepreneurial opportunities in India. Most of the jobs in India are created in the unorgainsed sector and too in the area of trade. At the global level, India becoming the leading country in the world for IT outsourcing , has created many businesses in the area of services. An entire eco system of businesses has been created around IT and ITES. Whereas China’s growth strategy was anchored on manufacturing. With the low cost of all factors of production, China was able to become the manufacturing hub for the world. Now China wants to build its service sector and aspires to compete with India , in services. If India has to grow at more than 7% p.a and the fast growth has to be sustained, manufacturing has to be developed. The share of manufacturing in our economy is only 16% and the Government has formulated a programme“Make in India” to increase the share of manufacturing share to 25% of GDP. 25 thrust sectors have been identified for increasing the share of manufacturing in GDP. To achieve this objective lot of skills are required. When there is availability of lot of people for work, there is also a big demand for specific skills to develop industries. Realising this need, Government has created a Skill development programme to fill the gaps in the skills required. Skill development programmes are in place at the National, Regional, Local levels and the target is to train 500mn people in the next few years in more than 43 fields. To develop manufacturing, a conducive eco system needs to be developed. To address this issue ,National level Industrial corridors spanning across many states and industrial corridors within the states were identified and in the process of implementation. These initiatives will help to develop the industrial clusters and infrastructure required for industrial development. This will go a long way in accelerating the growth of manufacturing and the economy. Countries across the world have recognised the importance of fast economic growth. The ruling parties/rulers across the world , irrespective of the form of government , drawn up ambitious plans for the growth of their economies. They conduct road shows to attract investments into their countries. Political climate across the world is becoming business friendly and the culture has changed. Earlier , investors used to visit the government offices to obtain permits. Now, the Government authorities , visit , various countries in the world and inviting the investors to invest. In India every state Government has a plan to grow fast and each state conducts Road Shows/Investment meets to attract investments in the state. This will go a long way in increasing the competitiveness of states and formulation of robust economic growth strategies. Digitisation and Technology. The latest development in technology has created a lot of opportunities for growth but at the same time has destroyed several industries. The fast penetration of mobile technology has advanced the social/financial inclusion and today even a person living in a rural area can use a smart phone to read and receive a high quality content which is of global standard. The advancements in AI, IOT, VR and block chain are going to improve the productivity several times. At the same time, faster adoption of these technologies will destroy many jobs. Further , misuse of these technologies is threatening the privacy of individuals. The exploitation and profiteering is also a big threat. Cyber security has become one of the major areas of concern. The adoption of these technologies should be handled with great care and measured approach to adopting these technologies will ensure a balanced Economic Growth . To ensure a balanced development of any industry and an economy, regulation and regulatory agencies play a major role. As the world becomes more and more complex, new regulations have to be formulated and new regulatory authorities have to be created. The time taken and procedures to be adopted to adhere to regulations results in significant costs for an enterprise. Regulatory costs have become one of the major costs of doing business today. The adoption of new technologies / manufacturing techniques has resulted in degradation of the environment. Higher level of manufacturing will result in higher pollution. Now that , we have set a higher target for manufacturing, there is always a dilemma, which one should be given precedence over the other. The opportunities before us are accompanied by several challenges. Considering India has a large population, all our future economic strategies should be based on use of the available manpower. Considering the large number of work force, even a small improvement in productivity in India will lead to big gain. This is the moment for India. We have very good economic development programmes in India. By formulating workable implementation plans and effective implementation, India can regain the global leadership in the third millennium. To realise this dream, all the stake holders in the society should work together and Make India a leading force in the world. Thank you.

3^rd Millennium – Opportunities, Issues and Challenges

R.Kannan , Hinduja Group

International Research Conference conducted by Indian Accounting Association, University of Mumbai and Chadrabhan  Sharma College on 7^th April 2018 .

Hon’ble Member of Parliament, Shri Dr. Kirit Somaiyaji, Prof.Shiware, Prof Chitra Natarajan, Prof. Ashok Joshi,  Prof. Madhu Nair, Prof Pratima Singh, Members of Indian Accounting Association, Faculty  Members and Researchers from all over the world , Ladies and Gentlemen, Good morning to all of you.

I am very happy to be part of the 4^th International Multi-Disciplinary Conference on Transition and the Transformation in 3^rd millennium.  I would like to thank Prof.Shiware and Prof.Chitra for inviting me to deliver the key note address.

I am happy to know that in this conference, research papers relating to:

i)                    Strategic Marketing and Planning

ii)                   Business Ethics

iii)                 CSR

iv)                 Global Management

v)                  HRM

vi)                 Digital Strategies

vii)               Innovation

viii)              Empowering Women

ix)                 Telecommunication, etc

Will be presented. It is very heartening to note that more than 400 research papers were received from various parts of the world and am happy to see , many dignitaries have come from abroad to attend this conference.

Am sure with these wide variety of subjects and perspectives, the participants including me will benefit a lot from the proceedings. The topic today is of utmost relevance in the context of continued disruptions and uncertainty in the Economy.

The advancements in the first 17 years of the 3rd  millennium are breath taking.  We are living in an age where continued disruption, uncertainty, volatility, complexity and ambiguity are part of our daily life. The advancement in recent past is much larger than the advancement witnessed in the earlier few thousand years in the past.

Few hundred years ago China and India were the leading economics in the world. According to some sources, both countries had more than 50% of the world’s GDP.

Later when Britain started expanding its operations globally, it became the leading economy in the world. Technology revolution catapulted USA to the leading position in the world. Afterwards, we witnessed the rise of Europe, Russia, Japan and South Korea.

From 1980 onwards, China started growing fast and India started reporting higher growth after liberalisation. Then we started hearing Acronyms like BRICS, MENA, CIVET, etc. In 1980 , China and India were of the same size  .  The breath taking reforms undertaken by China and the fast growth it was able to sustain for many years have made China , a global power today.

US and Europe and countries like Japan, Singapore and Hong Kong were contributing to the growth a few years ago. Even today, because of its large size, US contribution to the Incremental economic growth in the world is substantial. Since the growth potential in these countries have become less, the countries like China, India, Indonesia, Middle East and Arica have started growing fast.

According to predictions for 2050 by various experts, China will be the leading economy with a GDP of about $ 50 trillion, followed by US at $ 36 to 40 trn and India $ 27 to 30 trn. Indonesia will be the fourth largest economy in the world.

In the next 2/3 years, India will become the country with the maximum population in the world. It has the largest number of youth  in the world. The largest number of entrepreneurs in the world are living in India. We create  the maximum number of entrepreneurs in a year  in the world.

As per the forecast by all the leading financial institutions and Economists through out world, India will continue to grow at a rate of more than 7% p.a. for many more years. The high growth will create many opportunities for people from across the society. The path to the growth is paved with lot of challenges.

Indian society had gone through a fast transformation in the last few years. From total dependence on Agriculture and rural areas, the growth has shifted to services, manufacturing and cities. Despite, the level of urbanisation is only at 32%, what we find today is that lot of developments taking place in villages also. They are being provided with electricity, water, road connectivity, media and digital connectivity. The penetration of mobile phones in rural areas is taking information to every nook and corner of the country. 

The concept of joint family is giving way to nuclear families. In a family, many go to work, resulting in multiple income and high earning capacity. People have started spending money and India has become one of the high consumption economies in the world today.

The entry of e-commerce players has increased the consumption level.  Unlike in the past, today people spend lot of money on Education, Health , Leisure, Entertainment and Travel.

In an Economic Growth model, the growth of an economy is initially dominated by Agriculture and then manufacturing picks up. Finally, the services takes the dominant position. In the case of India, even without creating a big manufacturing base, the initial fast growth was supported by services. As the services grew, it gained its share from Agriculture in proportion to the lost share of  Agriculture. Whereas the share of industry and manufacturing remained at the same level for many years.

The fast growth in services was mainly supported by Trade. India has got one of the largest and deepest Retail systems in the world. There are six levels of trade before it reaches the final customer. At the retail level itself there are more than 15 million establishments. If we take the other six levels, it adds up to a lot in terms of number of entrepreneurs. This has created lot of business and entrepreneurial opportunities in India. Most of the jobs in India are created in the unorgainsed sector and too in the area of trade. 

At the global level, India becoming the leading country in the world for IT outsourcing , has created many businesses in the area of services. An entire eco system of businesses has been created around IT and ITES.

Whereas China’s growth strategy was anchored on manufacturing. With the low cost of all factors of production, China was able to become the manufacturing hub for the world. Now China wants to build its service sector and aspires to compete with India , in services.

If India has to grow at more than 7% p.a and the fast growth has to be sustained, manufacturing has to be developed. The share of manufacturing in our economy is only 16% and the Government has formulated a programme“Make in India” to increase the share of manufacturing share to 25% of GDP.  25 thrust sectors have been identified for increasing the share of manufacturing in GDP.

To achieve this objective lot of skills are required. When there is availability of lot of people for work, there  is also a big demand for specific skills to develop industries. Realising this need, Government has created a Skill development programme to fill the gaps in the skills required. Skill development programmes are in place at the National, Regional, Local levels and the target is to train 500mn people in the next few years  in more than  43 fields.

To develop manufacturing, a conducive eco system needs to be developed. To address this issue ,National level Industrial corridors spanning  across many  states and industrial corridors  within the  states were identified and in the process of implementation. These initiatives will help to develop the industrial clusters and infrastructure required for industrial development. This  will go a long way in accelerating the growth of manufacturing and  the economy.

Countries across the world have recognised the importance of fast economic growth. The ruling parties/rulers across the world , irrespective of the form of government ,  drawn up ambitious plans for the growth of their economies. They conduct road shows to attract investments into their countries.

Political climate across the world is becoming business friendly and the culture has changed. Earlier , investors used to visit the government offices to obtain permits. Now, the Government authorities , visit , various countries in the world and inviting the investors to invest.

In India every state Government has a plan to grow fast and each state conducts Road Shows/Investment meets to attract investments in the state. This will go a long way in increasing the competitiveness of states and formulation of  robust economic growth strategies.

Digitisation and Technology. The latest development in technology has created a lot of opportunities for growth but at the same time  has destroyed several industries. The fast penetration of mobile technology has advanced the social/financial inclusion and today even a person living in a rural area can use a smart phone to read and receive a high quality content which is of global standard. The advancements in AI, IOT, VR and block chain are going to improve the productivity several times.

At the same time, faster adoption of these technologies will destroy many jobs. Further , misuse of these technologies is threatening the privacy of individuals. The exploitation and profiteering is also a big threat. Cyber security has become one of the major areas of concern. The adoption of these technologies should be handled with great care and measured approach to adopting these technologies will ensure a balanced Economic Growth .

To ensure a balanced development of any industry and an economy, regulation and regulatory agencies play a major role. As the world becomes more and more complex, new regulations have to be formulated and new regulatory authorities have to be created. The time  taken and procedures to be adopted to adhere to regulations results in significant costs for an enterprise. Regulatory costs have become one of the major costs of doing business today.

The adoption of new technologies / manufacturing techniques has resulted in degradation of the environment. Higher level of manufacturing will result in higher pollution. Now that , we have set a higher target for manufacturing, there is always a dilemma, which one should be given precedence over the other.

The opportunities before us are accompanied by several challenges. Considering India has a large population, all our future economic strategies should be based on use of the available manpower. Considering the large number of work force, even a small improvement in productivity in India will lead to big gain. This is the moment for India. We have very good economic development programmes in India. By formulating workable implementation plans and effective implementation, India can regain the global leadership in the third millennium. To realise this dream, all the stake holders in the society should work together and Make India  a leading force in the world.

Thank you.

FDI in India

FDI – Astute Conduit for Trade Integration and Sustainable development – 2nd March

Keynote Speech Delivered in the International Conference on FDI Held by Department of International Business, Alagappa University.

R.Kannan, Hinduja Group

Shri. Prof. Subbiah, the Honble Vice Chancellor of the Alagappa  University, Shri.Karunakaran, Secretary to Government of Tamil Nadu, Dr. Narayana Murthy, Member of the Syndicate, Prof. Guru Mallesh Prabhu, Registrar of the University, Prof. Manickavasagam, Dean , Faculty of Management, Prof. UthayaSuryan, Prof.Muthuswamy, Ladies and Gentlemen, Good morning to all of you.

Indian Economy plays a major role in the growth of the world Economy today. Investors across the world are interested in investing in India . In the last four years, the FDI received by India crossed $ 200 bn. The interest of international investors in India is increasing and in Conferences organised by various states, Foreign Investors are committing billions and billions Dollars of investments in the states.

In this context, Department of International Business , Alagappa University is conducting an international conference on FDI, Trade Integration and Sustainable Development. In these two days, apart from the Speakers from Other countries, Experts from India are also participating. Several paper presentations were scheduled during this conference.

I am happy to be part of the programme and look forward to learn new concepts and perspectives on FDI . Am sure , all the participants will benefit a lot from the proceedings.

I would like to Congratulate Department of International Business, Algapppa University in Choosing this important Subject for the Conference and  wish the Seminar a great Success.

Global Economy

Global growth outlook is benign and augurs well for India, particularly for its export prospects. Both the IMF and the World Bank note a tangible improvement in the growth prospects of the US, the Euro Area and Japan. As per the World Bank (Global Economic Prospects, January 2018), global growth is estimated to pick up from 2.4% in 2016 to 3% in 2017 and further to 3.1% in 2018. This recovery is broad-based and largely attributable to a rebound in global investment. Growth in advanced economies is projected to moderate during 2019-20 while that in emerging market and developing economies (EMDEs) is expected to increase further to 4.5% in 2018 and average at 4.7% in 2019-2020. In the Euro area, growth is estimated to improve to 2.4% in 2017 with broad-based improvements across member countries supported by policy stimulus and strengthening external demand. In Japan, GDP growth is estimated to recover to 1.7% in 2017 supported by a recovery in consumer spending and investment as well as the implementation of a fiscal stimulus package but growth is projected to slow down to 1.3% in 2018 as fiscal stimulus is withdrawn and export growth moderates.

Global trade growth is expected to decelerate in 2018, to 4.3% from 4.6% in 2017. Reflecting the broad-based acceleration in the global economy, trade growth picked up in both OECD and non-OECD economies in 2017. According to the Netherlands Bureau for Economic Policy Analysis, export growth was especially strong from emerging markets—where exports grew by 4.8% year on year in January to November, compared with 3.8% export growth in advanced economies. Despite the global economy seeing continued strength in 2018, the global trade growth is expected to slow modestly in line with a deceleration in China's economy, given its outsized role in global supply chains. It is expected that  the authorities' move in 2017 to tighten credit conditions to have a lagged impact on investment and consumption growth in 2018, particularly as regulators tighten controls over household loans.

Indian Economy :

India’s growth prospects have become stronger both in the short and the medium term. Last quarter, the Economy grew by more than 7% , again , becoming the fastest growing Major Economy in the world.  The World Bank has projected India’s growth in FY19 at 7.3% and IMF has projected it to be 7.4%. . The opportunity for India re-emerging as a major contributor for global growth and sustaining this position for many years is the prediction by the leading Economists in the World. India will continue to do well and contribute to the Global Economic growth in the coming years.

Global FDI :

Global flows of foreign direct investment (FDI) had fallen by 16% in 2017 to an estimated US$ 1.52 trillion, from a revised US$ 1.81 trillion in 2016. While FDI in developing countries remained at a level similar to the previous year, more investment in sectors that can contribute to the Sustainable Development Goals is still badly needed. Promoting FDI for sustainable development remains a challenge. FDI to developed countries slumped by (minus) 27%, inflows into developing countries remained stable, at an estimated US$ 653 billion, 2% more than the previous year. Flows rose marginally in developing Asia and Latin America and the Caribbean, and remained flat in Africa. Developing Asia regained its position as the largest FDI recipient region in the world, followed by the European Union and North America.

After three years of growth, cross-border mergers and acquisitions declined in 2017. Their growth had already slowed in 2016, and they went on to contract by 23% in 2017, to US$ 666 billion. However, this still represented the third-highest level since 2007.

FDI to Developing Economies remained Stable at $653 bn, 2% more than the previous year. FDI to transition Economies declined by 17% to $ 55bn. Value of announced Green field projects showed a decline of 32% to $ 571 bn. The number of projects declined by 17%. In developing countries , project values announced halved.

The tax reforms announced by FDI are likely to affect the investment decisions announced by US MNEs, with consequences for global investment patterns. I was attending a meeting on SelectUSAsummit day before yesterday in Mumbai, where US officials want more investments into US from India. At present FDI from India in US stands at $ 12 bn. They feel this can be multiplied several times. They say, they regained their competitiveness through lowered energy costs which off sets the lower cost of labour in China. They had prepared an ambitious plan to revive their manufacturing sector.

In 2017, inflows to US reduced due to reduced inflows from a number of offshore financial centres.  In UK, inflows declined by 90% due to the uncertainty created by Brexit.

Higher economic growth projections, trade volumes and commodity prices would point to a potential increase in global FDI in 2018. However, elevated geopolitical risks and policy uncertainty could have an impact on the scale and contours of any FDI recovery in 2018. In addition, tax reforms in the United States are likely to significantly affect investment decisions by US multinationals, with consequences for global investment patterns.

India FDI

From the year Apr 2000 to Sep 2017 , for which the data is available, India attracted FDI of $ 518 bn including Equity flows, Re-invested earnings and other capital. The FDI equity Inflows alone amounted $ 353.34 bn. In the first six months of this fiscal $ 21.62 bn was received as FDI, which was 17% higher than the previous year. This was a very good growth considering the lower growth for other countries.

The countries which have the leading share in investment of FDI in India in the last 17 years  include ; Mauritius 34%, Singapore 17%, Japan 7%, UK 7%, Netherlands 6% and USA 6%.

The sectors which have received the maximum FDI include , Services sector 17%, Telecom 8%, Computer Software 8%, Construction Development 7%, Automobile 7%.

The States which received the maximum FDI were : Maharashtra 31%, New Delhi 20%,Karnataka 8%, TN&Pondy 7% and Gujarat 5%. Now the states including UP, AP and Telengana are attracting lot of FDI.

Factors Favouring High FDI in India

India will continue to attract very high FDI due to the following reasons.

1.      High Economic growth. All the leading agencies in the world predict that Indian Economy will continue to grow at more than 7% in the coming years and this will exceed Chinas growth rate. High Economic growth rate provides opportunities for high sectoral growth rates.

2.      Rapid Urbanistion of Metros, Cities and even Rural Areas. Due to digitization and penetration of mobile and data services is enabling transformation of Metros, Cities and Villages. Apart from Agriculture, several other opportunities have arisen on account of Digital Revolution.

3. Ambitious development  targets set by the Government for various infrastructure Sectors. The Central Government and State Governments had drawn up ambitious projects in the areas of, Industrial Corridors ( Centre and States ) ,  Smart cities , Port Development, Railways Development, Road Development, Affordable housing Development. This has attracted the interest of Several countries around the world.
4. Manufacturing Mission. India wants to increase the share of Manufacturing from 16% in GDP to 25% in GDP. With this in view, detailed strategies to develop 25 sectors under Make in India Mission were formulated and in the process of implementation.
5. Apart from that Several programmes like Start Up India, doubling Farmers Income, Digitising the nation and several well defined and well thought out development programmes were introduced by the  Government to increase the GDP growth.
6. Now Commerce Ministry has drawn up a plan to look at Industrial Development from Each Districts perspective and District wise Industrial Developments plan would be made.
7. Liberalisation of FDI. The government has lineralised many sectors for FDI. In many sectors today, 100% FDI is allowed. This has attracted the interest of investors across the world.
8. DIPP under the Ministry of Commerce has an Agency called invest India, whose main role to attract investments into India. They have a detailed database of opportunities for investment in India, which foreign investor can use. The data base is organized in terms of Opportunities in States, Sectors and Sub Sectors. There are expert desks created for different countries. In international investments, one of the issue is , availability of information. The Agency plays a major role in facilitating investments.
9. Introduction of  good governance system by government through new regulatory agencies. Indias regulatory agencies are highly regarded by others in the world. When the whole world was under stress, due to prudential policies developed by the agencies, India withstood the global melt down. New agencies were created in many sectors today. This protects the investors as well as customers. This enables a fair competition.
10. Emergence of Several Globally competitive Businesses. In the initial years, only Textile was globally competitive. Now we have many sectors, which are globally competitive. The sectors which have become globally competitive include Automobiles,Telecom, Chemicals, pharma, IT, Gems and Jewellery, R&D, etc. Several more industries will become competitive as we go forward.
11. When large investments are made, it should give good returns. In India, several sectors are profitable because of the large population we have and the large volumes it provide. This is one of the reasons for India’s attractiveness in the Global Scenario. Apart from the large Size, Constant movement of people to higher categories of income from one category at  all levels, creates demand for products at various price points.There is also an increasing propensity to spend  by  people.
12. Competition between States.  Every state in India has drawn up a plan to grow by more than 10%. Every year, they have started holding investment meets where they invite investors from all over the world. In these conferences, the investment opportunities are show cased and MOUs are signed with the potential investors. They sign MOUs with both Indian and Global Companies to increase the investments in the states.
13. Increased  Foreign Investor Interest in  India and India sectors. Considering the big potential for growth, Investors around the world are coming to India and exploring the scope for investments. In the last year, I had met more than 60 Foreign Delegations , which had shown interest in Investment in India. But one concern today is due to increased protectionism, every country wants investments in their own country. This is not going to affect the investments into India.
14. Role of Government AID Agencies /Pension Funds / Mutual Funds and Sovereign Wealth Funds. Japanese Government Agency, JICA in collaboration with JBIC has provided lot of funds projects in Infrastructure sector. Canadian Pension funds in India have invested more than$ 10 bn. Abudhabi SWF has decided to invest $ 1 bn in the  Infrastructure Finance Arm of the Government. There is lot of low yielding funds across the world have to be deployed in attractive investment opportunities and India provides a good scope for deployment of these funds.
15. Part of the Global Value Chain. India has become a part of the Global Value chain in many sectors and many MNEs have set up a part of their operations in India or adopting a strategy of outsourcing from India.
16. Ease of Doing business. India is one of the countries where ease of doing business is within top 10 in the world as reported by AT Kearney FDI investment Index. India ranks 7^th in the Index. If result oriented indicators like Economic growth rate, Growth rate of different industries, profitability, Ease of obtaining finance and number of entrepreneurs created every year , India’s rank should be in top 5. This is one of the reasons, why FDI investments are increasing in India faster than other countries in the world.

India has got one of the highest savings rate in the world. At 30% of GDP and on $ 2.5 trn, our savings in a year amounts to more than $ 750 bn a year.   All of our future investment needs could be met from only domestic sources. But investment pattern of savings is biased towards investment in Real estate and Gold. Accumulated savings in India is very high , which makes India a very strong country for investments.

In Conclusion, India has a highly favourable Eco system for   investments and other countries can not ignore India’s attractiveness and MNEs around the world should look at India for their global growth . The MNEs in India, should draw up aggressive plans for growth in the Indian market and invest more in India. Indian companies should have more participation in global value chains and more Indian companies should go global and manufacture products in India to serve global markets. .Thank you.

 
  

NPA article in Moneycontrol in May 2017

May 18, 2017 12:13 PM IST | Source: Moneycontrol.com

NPA ordinance – An innovative approach to faster resolution

Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.

   

R Kannan 

Global Economy is yet to regain the normal after the 2008 economic crisis. Banking system across the world was affected by the global melt down and the Non-Performing Assets (NPA) in many countries in the world witnessed a sharp rise from 2008. The economies across the world are still pursuing the path of recovery.

In the last few years, Indian Economy’s integration into the world economy intensified and 2008 crisis also had an impact on Indian Economy and its performance. This has affected the banks in both Public and Private Sectors. Since lending by Public Sector was more to the sensitive sectors, Public Sector’s NPA level was much higher than the norms.

To strengthen the banking system and to increase the transparency levels, RBI brought new rules on provisioning and the banks have to provide higher provisioning compared to the earlier norms. Adopting this new rule resulted in reclassification and higher provisioning by banks for Non-performing assets.

·          

Considering the India’s high economic growth, the sectors affected will see an upturn in the coming years and will return to black. In India, many mechanisms are available for resolution of NPA’s and Government and RBI are bringing innovative approaches to resolve NPA’s from time to time.

One of the issues for faster resolution of NPA’s was the fear of future investigation on resolutions arrived with the borrowers. The other was the way the Joint Lender Forum meetings were held and the decision taken in these forums. This was a slow process and this resulted in funds being locked up and not earning any income for the Banks.

The Government’s decision to give powers to RBI to arrive at resolution in individual cases is an innovative solution. RBI also relaxed the conditions for decision making at the JLF meetings. The Advantages of RBI taking the lead are -

a)The time taken for resolution will come down

b) RBI has the information about all the borrowers in all the banks and it is easy to consolidate and arrive at a single view of a borrower’s total borrowings with credit history.

c) When JLF meetings takes place, there is an independent body looking at the issue brings a fresh perspective.

d) Being the Regulator, It will be easy for RBI to coordinate with other resolution bodies in India; use their expertise, ascertain their views and bring in a 360 degree approach to resolve the problem.

e) The decision will be a joint one, where even RBI will be involved. In case of large borrowers, RBI can take the opinion of the Government also. This will bring comfort to decision makers in banks and they can decisions on resolution without the fear of future investigations.

Doubts are being raised about the effectiveness of this mechanism and how the judiciary will look at this process. In any such situations, where NPAs are very high, faster resolution increases the chance of higher recovery. Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.

Since the purpose of the mechanism is to expedite the resolution and release funds into the system, RBI’s role will be a catalytic one and collective decision of all concerned should be looked at with very positive approach by all concerned.

In Indian banking system, most of the lending is asset backed and in many cases, the borrowers are having large land banks and assets and they can cover the principal. In many cases, it would be possible to even recover 90 percent outstanding, when companies are owning lot of assets. In 2000, China had a NPA which was very large and they were able to bring the NPA’s from 40 percent of lending to respectable level today.

Doubts are being raised about, who will be the buyers of the assets on Sale. The leading Cash rich companies in each sector, Sovereign Wealth Funds, Pension Funds, Foreign companies, Foreign Investors, NRI’s are all waiting for opportunity to invest in India. Considering that India will grow at more than 7 percent every year, in the next few years and the likely increase in GDP growth on account of demonetisation and GST, investors are very bullish in India. The high GDP growth itself will aid in reducing the NPA.

Most of the Indian banks now focus on Retail customers, where the scope for large NPA’s is limited. Further the development of Indian Bond market and introduction of INVITs and REIT’s is going to help in reducing the future NPA. Most of the sensitive sectors, will use other funding channels / new financial instruments for executing their projects in future. Through further capitalisation of banks and higher growth in Banking, the NPAs will be back to normal level in two to three years.

Author is Head Corporate Performance Management at Hinduja Group

GST article in Business Today

GST impact: Business class can't avoid paying taxes; prices of most consumer items to come down

R.Kannan   New Delhi     Last Updated: July 7, 2017  | 08:24 IST

The Goods and Services Tax (GST) is a path-breaking change in the world's tax system. This type of large change was not effected in any part of the world earlier. The system will take two-three years to stabilise. In the beginning, there will be a lot of issues and several stakeholders, including state governments and industry associations, are not certain about the effects of GST on their finances and business models. Once it is introduced, there will be several changes in rates and classifications of commodities and services. The government has already set up an organisation to address the teething problems regarding GST.

Impact on the economy

GST is likely to bring many of the entrepreneurs, who are not paying taxes today, under the tax net and increase the government's revenue. Further, the transactions happening in the parallel economy will be captured in official statistics, resulting in higher GDP. It will increase tax collections and reduce the budget deficit, and the government will be able to spend more on economic development.

In the financial year 2016/17, services constituted 53.8 per cent of the Gross Value Added (GVA). Now, an increase in service taxes by 3 per cent will see an increase by Rs 40,000 crore. With an expected 10 per cent growth in services within the economy, service tax collections alone can go up to Rs 75,000-1,00,000 crore, a very large increase over the previous year. The cost of services provided by banks and non-banking financial companies (NBFCs), telecom companies and housing societies will also go up. There will be an increase in cost to the customers.

Impact on the consumers

In more than 50 per cent consumer goods, the cost is likely to come down. In case of services availed by the consumers like telecom, banking, financial Services, online shopping, insurance, eating out, airline travel and housing society, charges will go up. Consumers will have to brace themselves to pay higher bills for services availed. Since there is no pass through for fuel, they are likely to remain the same. Television, movie tickets, processed food and cement are likely to become cheaper. Car buyers can rejoice as the mid-segment cars will be neutral under GST. Small cars are likely to become cheaper. However, luxury or SUV cars are set to become expensive. Wherever the manufacturers see reduction in costs, they have to pass on to the consumer under the anti profiteering rule. Overall, the customer should see a net gain.

What it means for large corporate houses

As an anti-profiteering provision has been made, large companies have to pass on the saving in any of the costs due to the introduction of GST. In case the costs go up due to supply chains not being ready with GST registrations and filings, the costs will either have to be absorbed or have to be passed on to customers. However, no corporate can increase profits on account of GST. In the next three to six months, due to the uncertainty in demand and change in distribution models, inventory is likely to go up, and the working capital requirement is set to rise, which is expected to increase the cost of funds.

Several companies have availed investment benefits, which were for a 10-20 year period, and it is not clear how the transfer of benefits under the new system will pan out.

Will SMEs suffer?

Small and medium businesses have also been brought under GST. Here, the tax will be uniform for all and it will increase cost at the point of supply. As all transactions will be captured in the GST regime, it will have an effect on additional tax collections under the income tax. According to a provision, if the turnover is less than Rs 20 lakh per annum, there is no need for registration and payment of GST. However, many small companies are suppliers to large companies, and they have to register under GST if they want to continue with it.

Today, the distribution of goods is organised in sync with the rates asked by the states and the warehouses. As the rates will be synchronised now, there will be no need to keep so many clearing and forwarding (C&F) agents across the states, and warehousing and distribution could be optimised. This move will lead to consolidation of fragmented industries, and many small and medium industries will have to be consolidated.

In the short run, there will be a lot of issues and the small and medium enterprises will require guidance from the government and large buyers. In the long run, GST would be beneficial for all stakeholders, and it will be good for India's economic growth.

R. Kannan is Head of Corporate Performance Monitoring and Research, Hinduja Group