Analysis of Current Developments
Tourism & Aviation
The tourism minister, ML Khurana, has resigned, and the aviation
minister, Ananth Kumar, is now seen as the most incapable minister in this regime, not
just by the press but also by his cabinet colleagues. And so, both sectors are without any
direction, even as tourism growth has dropped from 4 percent in 1997 to just 0.5 percent
in 1998. Premium and medium rated hotels have been badly hit, and room occupancy in metro
cities is almost 20 percent below last year.
Both public-sector airlines, Air India and Indian Airlines,
continue to make huge losses, despite some window dressing of financial accounts. Many
cost-cutting and turn-around ideas are currently in the news, but the only sure fact is
neither of them has the funds to buy new aircraft.
Bypassing the aviation minister, the PMO has on its own taken
some recent initiatives. The government now plans to corporatise 5 existing airports,
remove Air-Indias monopoly on cargo-handling, and auction air routes to private
airlines. Details are, however, still awaited.
The coming budget will be largely neutral for the tourism industry,
except some minor changes in depreciation norms. After the budget, the government is
likely to initiate partial privatization of public sector hotels and cargo--handling, or
at least put these ideas into motion. The aviation minister is tipped to lose his job,
possibly in the next cabinet reshuffle. However, none of these events will alter the
depressed market conditions in the near term.
Overall Likely Change:
Mining & Metallurgy
The FIPB has so far cleared more than 40 FDI proposals for mineral
prospecting, but none of these (with the exception of RTZ) has been able to move forward,
mainly due to bureaucratic hurdles and political impasse at the state level. Foreign
mining firms are disappointed with having to wait for more than 4 years, but they also
know that India is a long-haul country. Most foreign majors are now keeping a low profile
in Delhi, while quietly expanding partnerships and relationships at the state level. BHP
has recently formed a joint venture with the state-owned Hindustan Zinc for prospecting of
base metals in Rajasthan.
Indian steel producers, both primary and secondary, are now in
some serious difficulty due to falling demand, rising interest costs and tough competition
from imports (which are on average 20 percent cheaper than domestic steel). Steel
production in Apr-Dec 98 fell 5 percent from the previous year. Indias largest
steel company, SAIL, suffered a net loss of over $ 250 million in Q1-Q3, and TISCO profits
fell by 40 percent in the same period. Banks are now extremely reluctant to lend, though
three well-known steel companies with political clout, Ispat, Essar Steel and Jaiprakash
Industries, have managed to get the Finance Ministry to press public-sector banks to
extend fresh loans. However, this "bail-out package" has now become very
controversial, and the influence of these steel barons is now on the wane, after negative
media coverage and counter-lobbying by steel using industry.
Political conditions in 4 out of 5 mineral-rich Indian states are too
tenuous for local regimes to take major decisions on mining licenses in the near term.
Rajasthan has a government which will take time to settle down, governments in Orissa and
Bihar are on the defensive (and local politics is in flux), and Andhra Pradesh is in the
final lap towards elections to be held later this year. Thus, it is unlikely that mining
MNCs will make any progress soon. For instance, a committee set up more than a year ago by
the Andhra government to evaluate bids for gold prospecting has still not given its final
report, underscoring the complexity of local pulls and pressures.
Demand for steel is unlikely to pick up in the short term, and
despite some cosmetic sops to steel producers in the budget, the investment environment
and market condition in primary metals are likely to stay negative.
Overall Likely Change:
Ports & Highways
Infrastructure development has become a key priority, at least going by
recent announcements and policy changes. After allowing 100 percent foreign equity in
port/road projects a few months back, the Vajpayee government recently
"launched" an ambitious 5,000 km road project to connect north-south and
east-west parts of the country. While financing and legal issues are unclear -- and,
indeed, the big question is where is the money going to come from ? -- the
governments intentions and attitude are now clearly positive.
While the above 5,000 km road scheme is too ambitious and too
vague, some specific investor-friendly measures have been announced. For instance, banks
have been given first charge on toll revenues, promoters of BOT road projects have been
allowed to dilute/assign their equity, and toll rates have been partially indexed to
foreign currency movement. A draft road concession agreement also includes specific
traffic guarantees to project developers. However, some states are not quite happy with
these developments, since these new guarantees are often set against their share of
central funds. Consequently, many road projects are now awaiting the signature of state
The government has made similar changes in rules governing
private port development. New ports under BOT scheme have been allowed to charge higher
tariffs than what is being charged by government ports, albeit with some conditions
attached, and also to denominate vessel-related tariffs in hard currency. However, the
government and private port developers are in conflict over indexing of port concession
fees to inflation. Both domestic and international financiers have indicated that they
would be unwilling to lend unless there is full built-in hedging against currency and
inflation volatility in the concession contract.
For the first time, a municipal authority has given traffic
guarantees to a private bridge developer. The East Coast Construction Company has also
been promised by the town authority of Karwha (Gujarat) that no bridges will be
constructed for the next 7 years within a radius of 10 km of the current project.
The problems in this sector are now, for the most part, technical in
nature, and there is agreement -- even some confused hurry --among politicians on the need
for foreign investment. The PM himself is taking an interest, and the absence of a
permanent minister (the Law Minister is currently holding additional charge of Surface
Transport) gives him more elbow room to shape policy. Further, aside from some
environmentalists, there is really no major political lobby opposed to more roads and
ports. Even state-level politicians know that many jobs are created for locals in
infrastructure development. On the other hand, the bureaucracy is still an obstacle to
infrastructure reforms, and many ill-prepared contracts and ideas are inspired, especially
since ministers are too pre-occupied with political problems.
Is this likely to continue ? We think so. Current problems over
concessions, contracts and tariffs will continue in the short term, but the coming budget
will offer tax benefits to facilitate funding of ports and roads. A tax of 1 percent on
petrol (for developing highways) may be extended to cover diesel.
Overall Likely Change:
The appointment of a new telecom minister, Jagmohan, has led to fresh
problems for foreign investors, and a war of nerves on the issue of telecom license fees.
The previous telecom minister, Sushma Swaraj, had announced the extension of existing
licenses by 5 years, and even the PM has repeatedly supported re-working existing telecom
contracts on more realistic lines. Prior to Jagmohans appointment, expectations had
been building up that the government would finally provide some relief to an ailing
industry -- cellular operators are incurring an estimated cash loss of approximately $ 50
million every month -- but the new telecom minister has vociferously opposed increasing
license period or reducing license fees. He recently refused to show up at a recent
high-level telecom conference, and his unbending attitude has antagonized both Indian and
The cellular business has now got 1 million subscribers in India
-- of which more than half are in smaller cities -- but the usage time is very, very low,
and most people appear to be using their handsets only as pagers. Mounting losses, along
with no real hope of market upturn in the near to medium term, is forcing major re-shuffle
among existing telecom MNCs in India. Swisscom has diluted its equity in existing cellular
JV, Ericsson has downsized its operations in India and deferred all major investments,
Bell Canada is keen to reduce its equity in basic telecom JV, France Telecom has pulled
out of its JV in cellular operations, and even Telstra (which has been quite confident
about its Indian business all along) has put a hold on further expansion. Not just
cellular, but basic telecom is also seeing some exodus: the RPG Group, a domestic company,
which holds the basic license for Tamil Nadu (jointly with NTT and Itochu), is selling
India has received 56 new satellite slots from ITU, a
substantial hike in its space assets, and the government has drawn up initial plans to
send 20 satellites in next 10 years.
Not much is known about the new ministers mindset with regard to
reforms, but this much is true that he is not part of the RSS/Swadeshi lobby
which wants to see a diluted role for MNCs. However, he is also known to have strong and
independent views, is not afraid of controversy, and generally does not follow
others bidding. But he is also a political lightweight in the larger scheme of
things, more so because he does not belong to any recognized "camp" within the
BJP fold. Further, a high-level ministerial committee (headed by the reformist Jaswant
Singh, also the current Foreign Minister) has now de-facto usurped the policy making role
of the Telecom Ministry, and the PMO has sent strong signals of wanting to expedite
telecom and infrastructure reforms.
So while there is good news for telecom MNCs in the long term,
it is also true that the government desperately needs to raise revenue in order to contain
its growing fiscal deficit. The Finance Minister will be hard pressed to defer or lower
telecom fees. So, in the end, we suspect that there will be a compromise: telecom licenses
will be extended, and some extra time given for payment, but there is unlikely to be a
blanket moratorium or reduction in fees.
Overall Likely Change: