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The world looks quite different when we turn the lens around, good things appear bad and bad appear good, the challenge remains of understanding others' perspectives and still deciding and acting to make things better

Good News

Good News

A quick preview of the good news

Addressing India’s Literacy Challenge

The Frontline

Addressing India’s Literacy Challenge
A brief discussion with Sourav Banerjee, India Country Director for Room to Read, a global non-profit organisation whose mission is to tackle the problem of childhood literacy across the developing world

Investing in the New India Story

The Investor

Investing in the “New India Story” – our detailed thoughts on the opportunity and challenges of investing in India

The Big Picture TEST, Metrics

The Big Picture TEST, Metrics

Manufacturing and trade growth momentum in India continue in March, while the RBI cut benchmark interest rates for a second successive months; China’s economy shows signs of recovery in March with robust manufacturing and export growth

Last Month Through India’s Eyes

Last Month Through India’s Eyes

China blocks Security Council resolution to tag Jaish-e Mohammad chief as a terrorist, President Trump’s plans to withdraw tariff concessions to India under the Generalised System of Preferences, Nirav Modi arrested in London as part of the US$2bn Punjabi National Bank fraud scandal

This Month Through India’s Eyes

This Month Through India’s Eyes

Indian press voices on the temporary shutdown of Jet Airways, the impact of potential US sanction on India with regards to its oil imports from Iran and the commencement of Apple hardware in India

Pointing to the Future

Pointing to the Future

India’s need for a new trade strategy viz China; Evaluating the benefits and costs of a single-rate GST; The implications of Italy’s decision to join the Belt Road initiative; The case for an India-Taiwan partnership; The need for a lower cost of capital in India.

Big News

Big News

Voting commences in the world’s largest election; 200 US companies shift their manufacturing bases from China to India; Indian private equity investment increase by 100% over the previous year; Inflation rises to a five-month high in March; India and China in talks to form a collective for the sourcing of oil; RBI lowers interest for a second successive month

Apriil 2019

This month, other than the coverage of the general election [1], the Indian news media focused on notable business developments including the shutdown of Jet Airways, one of India’s largest airlines and the oldest private operator, and Foxconn’s decision to shift mass production of iPhones from China to India.  In addition to these, commentary also focused on the potential impact on India from the termination of the waiver extended by the US to India from its Iran sanctions, given India’s large oil imports from Iran.

Jet Airways suspends all operations following lenders refusing to infuse additional funds

One of India’s largest airlines, Jet Airways, was forced to temporarily suspend all flight operations and ground all its aircraft, following a failure to secure additional funds from its lenders or investors, and facing mounting losses due to the increase in global oil prices.  Given the substantial disruption to air travel in one of the world’s fastest-growing aviation markets (at the peak of summer holiday season in India), various media outlets evaluated the implications of the default for India’s aviation industry, comparing it to the earlier default of Kingfisher Airlines.

A column in The Economic Times highlighted the implications of the Jet Airways shutdown on the Indian aviation industry, while noting how full-service airlines in India are unable to compete with low cost carriers. “It looks like Jet Airways Ltd.’s luck has finally run out… On one level, you could argue that this is a good sign for India: Its institutions are holding up. State-owned banks are Jet’s biggest creditors and they seem unwilling to throw more money at the airline without a clear revival plan. This is a big change from the past, when they kept supporting one of Jet’s rivals, the ill-fated Kingfisher Airlines Ltd., long after it seemed rational to do so…  I say its luck has run out because in the past it consistently seemed to benefit from government intervention that drove many of its full-service competitors out of the market….  In the end, however, the market wins out. If you are competing against low-cost airlines that still somehow provide equivalent service in economy class, not to mention a full-service airline, Air India Ltd., that’s state-owned and can absorb whatever losses it wants, you can’t dodge fate forever…”.   It went on to discuss what the failure of virtually every full-service carrier implies about India’s consumer market, “Indian low-cost carriers are good by world standards: They are pretty ethical about not hiding extra fees for example, perhaps because if they charged you to print out your boarding pass at an Indian airport, there would be riots. But it’s still odd that a country that might soon be the world’s fifth-largest economy is unable to support a healthy aviation sector, which should include a handful of competing full-service airlines. I can’t help thinking this tells us something about the reality of the famed “Indian middle class.” While marketing executives and consultants worldwide might salivate about its growth and potential, the facts seem to suggest that regardless of increasing prosperity, we are still very much bottom-of-the-pyramid consumers. Who needs free food, lounge access or the possibility of an upgrade anyway?… If Jet collapses, we should see its demise as another sign that sectors in even an increasingly prosperous India may not look like their counterparts elsewhere. Or perhaps we are just ahead of the times, and low-cost carriers may slowly eat away at full-service airlines across the world.”

A column in The Financial Express also noted the lack of purchasing power to support full-service airlines, while also arguing that Jet’s management and its lenders should have been more proactive in managing the various issues faced by the airline over the last year, apportioning part of the blame to the employee unions as well, “Even in late 2017, ratings agency CRISIL had sounded a warning on the aviation industry, pointing out that rising fuel prices could hurt airlines. Even otherwise, it has become evident over the last few years that the country simply does not have enough purchasing power to be able to sustain full-service carriers; in fact, there have been quarters in which even the well-run no-frills airline Indigo has posted losses. Which is why, it is surprising the banks were not more alert about their exposure to Jet Airways and didn’t push the management to pull up its socks…  There are lots of lessons to be learnt from the closure of Jet Airways. First, bankers need to be far more vigilant about their loans and strict with their borrowers. Employees, for their part, need to be far less demanding. While it is unfortunate that so many people have lost their jobs—not just those with Jet, but in other companies that have been wound up—the unions and officers’ associations must accept some of the responsibility since their demands are often unreasonable and their rigid stance, on salaries and increments for example, have been a contributing factor to businesses getting destroyed.”

The Business Today outlined the reasons why Jet Airways poses a bigger problem to its lenders and the government: “On the surface, there was nothing in common between the flamboyant Vijay Mallya and the highly reticent Naresh Goyal…  Both men though built airlines with wonderful flying experiences. Kingfisher, when it was flying, was one of the best airlines for passengers both in economy and business classes. Jet, of course, had set new standards when it first came in and its service quality during its heydays was only matched by Kingfisher…  For bankers and vendors though, both men were bad businessmen when it came to running an airline. Kingfisher Airlines of course never made any money during the time it was flying and kept borrowing from bankers promising to turn around soon. But Jet, which at one time had a great market share (over 20 per cent) and made profits was not particularly well run as a business either. It made profits only when policy conditions favoured it, or when the aviation sector was enjoying particularly benign times. Once aviation fuel costs or other expenses started rising, Jet would start haemorrhaging money… For both bankers and the government though, Jet is a far worse nightmare than Kingfisher was. Mallya had a string of businesses and physical assets. He owned big houses in metros, had commercial real estate, and was the owner of multiple profitable businesses – including USL, UB and Mangalore Chemicals & Fertilisers. He owned a stud farm as well as a luxury villa in Goa where many parties were held… For bankers, there is no such comfort in the Jet case, while its liabilities are actually more. (Mallya’s liabilities look more currently by Rs 500 crore or so but that is because of interest accrued, not principal. The Rs 8500 crore that Jet owes lenders is principal, not interest). Naresh Goyal stays in London most of the time and he has no other business in India that can be seized or monetised. Jet itself does not have any physical assets – in terms of real estate or enough planes. There is nothing much that bankers can do to recover the money unless some buyer comes forward and takes over the grounded Jet.”

 

Temporary exemption granted from US sanctions on purchase of Iranian oil to end on May 2nd

The US government took a decision not to extend the import exemptions it had granted to eight countries, including India, from importing Iranian oil (which were granted to after Iranian sanctions were put in place in November 2018).  With the exemptions terminating on May 2nd, India will have to cease purchases of Iranian crude or face economic sanctions against its dollar-denominated banking activities. Various media publications examined the implications of the sanctions on India’s economy given on imported oil from the Middle East, while highlighting the importance of India’s bilateral strategic relationship with the US in comparison to its trade relationship with Iran.

Live Mint detailed out the impact of the sanctions on India, outlining the options for India ahead as well as the potential challenges and additional costs it will likely face: “The removal of Iranian oil from India’s energy sourcing basket may have major implications given that India has been a major importer of Iranian oil…  India’s energy needs are primarily met from imports. India will need to come up with options that offer terms as attractive as those offered by Iran, including 60-day credit, free insurance and shipping. The prices in the Indian basket of crude, which represents the average of Oman, Dubai and Brent crude, have been firming up. Any spike in global crude prices will impact India’s oil import bill and trade deficit. Every dollar increase in the price of oil raises the import bill by around ₹10,700 [2] crore on an annual basis…  India may increase its dependency on oil imports from Saudi Arabia and the United Arab Emirates (UAE) at a time when the West Asian nations plan to increase their investments in India… In addition, US shale production may offer India a reprieve, with the world’s third largest oil importer upping its bets on American supplies…  Finding an alternative supplier at competitive terms quickly for India may be tough. The global oil markets are in a tight position. The Organization of the Petroleum Exporting Countries (Opec), which accounts for about 40% of global production is continuing with the supply cuts and the US administration is also imposing sanctions on Venezuela’s state-owned oil firm Petrуleos de Venezuela SA.”

An article in The Indian Express covered the possibility of both India and China, the two largest importers of Iranian oil showing a degree of defiance while cutting back on their exposure to Iranian crude.  “India, the world’s third-biggest oil consumer, meets more than 80% of its crude oil requirements and around 40% of its natural gas needs through imports. Domestic oil and natural gas production has been declining for the last few years, even as the energy needs of the economy have grown. India is Iran’s top oil buyer after China. Iran was the fourth largest supplier of oil to India in 2018-19, and other suppliers may not provide the same benefits in the form of price and credit facilities…  The Eurasia Group said in a research note that “New Delhi will cut imports substantially, but probably maintain approximately 100,000 bpd (barrels per day) of Iranian imports paid for using a rupee payment system. This is less an energy security decision than a political one… In the past several months India has worked hard to significantly diversify its energy sources in preparation for this situation. But India’s ties with Iran are significant and historic, and New Delhi will work hard to maintain some links.”  The big concern is that the substitute crude suppliers — Saudi Arabia, Kuwait, Iraq, Nigeria and the US — do not offer the attractive options that Iran does, including 60-day credit, and free insurance and shipping. The challenge is to secure an alternative supplier at competitive terms in an already tightening global situation. The projected drop in Iranian exports could further squeeze supply in a tight market.”

A column in The Hindustan Times looked at the foreign policy implications, outlining why India should be pragmatic enough to realise that Iranian crude is not worth risking the bilateral relationship with the US. “The United States (US) has decided not to grant an extension to any country for importing Iranian crude from May 2. In November, the US had allowed eight countries to continue importing oil from Iran albeit in significantly reduced quantities. India was among the eight countries to have been granted the waiver. Three of the eight countries (Greece, Italy and Taiwan) have already brought their imports to zero. Among the rest, Japan and South Korea don’t rely much on Iranian crude. This leaves India, China and Turkey as the problem cases…  The government is hoping that the reduction to zero will not be imposed all of a sudden. After all, Iran was India’s second largest oil exporter as recently as Q1FY19. The recent spike in crude prices are adding to the worries. But India has the experience of significantly reducing Iranian crude imports in the run up to 2015 Iran nuclear deal. However, the imports never went to zero, which is what the US seems to be demanding now. This will be new territory… Some European nations are trying to find a way to continue doing business with Iran but haven’t encountered much success. Most European companies would any day prefer keeping their access to American markets and financial system over whatever revenues they make out of Iran. The Arab countries are bound to get stronger vis-à-vis the Iran-Syria axis. Despite all the rhetoric of civilisational ties with Iran, India’s economic interests, too, are much deeper with the Arab states. And within Iran, economic hardship might weaken the moderate forces and catapult hardliners to power. India should be prepared for such power shifts in the region.”

 

Foxconn to start mass production of iPhones in India, a shift from China

Foxconn Technology Group Chairman Terry Gou announced that the iPhone will go into mass production in India this year, a shift for the largest assembler of Apple’s iconic handsets, which has long concentrated its production in China.  Media houses lauded this news as a positive shift in India’s global standing as a manufacturing hub, noting the importance of the government incentives provided in attracting large companies to shift production to India.

Live Mint highlighted how low labour costs (one third of China’s) and manufacturing potential could propel India to serve as an export hub for the Asia Pacific region. “India has become the fastest-growing smartphone market in the world, while China stagnates and Apple loses share to local competitors such as Huawei Technologies Co. and Xiaomi Corp. Apple has been a minor player in India, in part because of its high prices, but local manufacturing would help the Cupertino, California-based company avoid import duties of 20%…  The Indian assembly line of Foxconn’s Hon Hai Precision Industry Co. would serve local and export markets by the time Apple announces its next iPhone models in September…  Gou said that his company is talking with the government about investment terms… Producing phones locally would also help Apple’s retail push in India. The company needs to meet a 30% local sourcing rule to be able to open its own stores in the country.”

The Economic Times outlined the significance of the shift, noting that importance of a strong incentive regime and the sustained increases in manufacturing which will be needed to service India’s large and growing smartphone market indigenously.  “Taiwanese contract manufacturer Foxconn will begin from July the commercial production of iPhone X range of smartphones for Apple from its 160-acre factory off Chennai… “The plans are to step up production capacity and diversify to even higher models going forward,” said an official privy to the company’s plans… Sustained increase in manufacturing will depend on, among other factors, the continuation of a favourable incentive regime into the next government… Around 290 million handsets were assembled in India in 2018 up from 58 million in 2014, according to data from the Indian Cellular and Electronics Association… Now the challenge is to move from 290 million to 500 million phones and then to one billion by 2025.”

[1] Covered in detail in this month’s Leader
[2] Equivalent to c.US$1.5bn