India Focus

S t r a t e g i c    A n a l y s i s    a n d    F o r e c a s t s

Vol 4, No 1

January 1999

Politics    •    Business        Economy    •    Society        Culture    •    Diplomacy

Industry Forecast -Part 2


Analysis of Current Developments

Short-Term Forecast

Banking & Insurance

Indian banks continue to be trapped under conflicting pulls: increasing labour unrest, high bad debts, political pressure on them to lend to favoured corporates (such as the beleaguered Essar Group, which has been sanctioned $ 600 million worth of new debt by public banks in a controversial move), and recent moves by a resurgent Chief Vigilance Commissioner to fix accountability for bank fraud. The end result is that banks have been unable to introduce any real systemic reforms despite many ideas, seminars and write-ups about how to tackle the problem of rising Non-Performing Assets. The government appears to have given up on the much-talked about idea of "Asset Restructuring Committees.," But some banks are now insisting on mandatory pledging of shares before lending to companies, and are also amending their loan agreements to stop indiscriminate intra-group deposits.

Foreign banks and investment funds continue to be adversely affected by a weak stock market and poor lending offtake: Bank of America has decided to sell its retail business in India, and Standard Chartered Bank is planning a 30 percent reduction in workforce.

The proposed IRA Bill, which allows up to 40 percent foreign equity in the insurance sector (26 for insurance majors, 14 for overseas Indians) has finally been referred to the Standing Committee on Finance, rather than a joint Select Committee. This is good news for two main reasons: 1) the SCF has already voted in favour of foreign equity in insurance on earlier occasions, and its members are generally familiar with issues involved, and 2) the SCF is now headed by a Congress MP, Murli Deora, and has two ex-Finance Ministers, P Chidambaram and Man Mohan Singh, as members. All three have supported 49 percent foreign equity in insurance in the past.

The IRA Bill has created tremendous dissent within the ruling coalition, and many conservatives within the BJP and allied parties feel that Prime Minister Vajpayee has ridden rough-shod over them on this and many other issues of economic policy. RSS leaders, in particular, are upset with Vajpayee, and are now determined not to let the moderate faction of the BJP win on the IRA Bill issue. Vajpayee, after getting his way over the Patents Bill, is also unwilling to risk his government on an issue which is strictly not part of any global commitment. There will, thus, very likely be a compromise, and the IRA Bill is quite unlikely to be passed -- it may not even be introduced -- in the next session of Parliament.

The ongoing wage negotiations between the Indian Banks’ Association (IBA) and bank labour unions appear headed for an impasse, and it is possible that there will be more strikes in the banking sector in the short term.

Overall Likely Change:

Oil & Gas

The government finally introduced its "New Exploration Licensing" policy gives greater tax concessions in exploration and development contracts, and also held meetings with potential investors in Europe and USA. But this policy failed to ignite any great excitement -- even though major MNCs such as Enron, UNOCAL, British Gas and Total have decided to bid -- since it was in the making for a long time, and was generally expected, and discounted, by foreign investors.

Meanwhile, the controversy over the non-competitive award of two discovered oil fields to the Reliance Group, a politically very well connected domestic conglomerate (and now increasingly active in the hydrocarbon sector), continues. Even though the Delhi High Court has recently lifted some constraints on the government in formally signing those awards to Reliance, related cases are still working their way through other courts. Also, one of Reliance’s main lobbyists in Delhi was recently implicated in a high-profile criminal ring, and some incriminating evidence was found on him suggesting that Reliance had advanced access to secret government policy documents.

Despite repeated official pronouncements, there has been no concrete move to set up a new Gas Regulatory Authority or introduce legislation to free the gas industry from government control. However, the BJP government has continued the gradual price decontrol policy of the previous regime, and has increased the price of cooking gas.

The PMO is playing a key role in initiating and monitoring oil reforms, but it has been so far unable to enforce transparency. New contracts are being delayed, and existing awards -- such as to Hardy Oil (UK) -- are being re-worked, all because of corruption, intense lobbying and bureaucratic egos. The PMO will continue to send positive signals to foreign investors, but unless there is a change of guard at the top in the petroleum ministry no major developments are likely in coming months. The rumoured role of the current Petroleum Minister in providing favours to Reliance has spawned much speculation, but the Prime Minister is unlikely (or unable) to remove the Petroleum Minister, since Reliance is a major benefactor of key allies and senior BJP leaders.

Overall Likely Change:


Though this sector has seen a number of policy initiatives and high talk by the government, most foreign investors remain dejected and uninspired. The new "Mega Power Project" policy has already caused much confusion and anger, and the Power Minister has been forced to offer similar tax and import concessions to existing IPPs and equipment providers. The financial closure of most foreign power projects still remains elusive due to conflicting claims and delays over escrow cover, re-allocation of fuel linkages by local authorities, and lack of credit allocation from Indian financial institutions.

Enron is on schedule over the commissioning of the first phase of its Dhabol project, and trial runs on wheeling power to the government grid have started recently. The ruling Shiv Sena party’s recent promise of free power to farmers in Maharashtra could jeopardize prospects for Dabhol Phase II, since free power would put the local state electricity board in further financial distress. Enron has, meanwhile, pulled out of a proposed Tamil Nadu project due to non-availability of escrow cover.

PR Kumaramangalam, the current Power Minister, has earned mixed reviews so far, and is viewed as big on lofty policies but weak on follow-up and coordination. He recently created negative "atmospherics" by threatening IPPs with the cancellation of their techno-economic clearances unless they achieve financial closure by March 31. But both are unlikely, financial closure or cancellation. Meanwhile, a key judgement from the High Court in Madhya Pradesh on escrow cover is expected in March ‘99, and informed legal opinion is of the view that the HC will likely uphold the priority of power producers on escrow accounts. If so, this will re-ignite investor confidence.

Overall Likely Change:

Other Sections in January 1999 Issue

Industry Forecast: Part 1

Consumer Goods
Pharmaceutical & Health Care
Industry Forecast: Part 2

Oil & Gas
Industry Forecast: Part 3

Tourism & Aviation
Mining & Metallurgy
Ports & Highways
Political Trends Anti-Christian Agitation
Analysis & Implications
Economic Summary
(including Budget Forecast)

Home Page What is India Focus?
Indian Business & Political Consultancy View Some Past Issues
Why Political Risk? Subscribe
Staff Profile Order Complimentary Report
Client Testimonials & Press Reviews Contact Us