Sec. State Rice Optimistic about Nuclear Deal, Receives Forbidden Mangoes

During yesterday’s US-India Business Council meeting in Washington, the focus was supposed to be on civilian nuclear cooperation. Ultimately, as the WSJ notes, “mangoes carried the day”.

US Secretary of State Condoleeza Rice (pictured) spoke to the assembled Indian and US businessmen and acknowledged that progress on the nuclear cooperation deal had been slow but noted that she was “certain that we will reach final agreement and be in a position to complete this deal by the end of the year.” As Kesav reported for the Wire before, the agreement has stalled recently due to a variety of concerns.

Following the speech, India’s media adviser Sanjaya Baru presented a basket of mangoes to Rice and declared:

“[mangoes are] “the best symbol of the diversity of Indian society and democracy. Nothing divides the Indian people more than our differences on which is the best variety of mango — we have 700 of them — but nothing unites the Indian people more than our firm belief that this is truly the king of fruits.”

Following on this, FedEx International president Michael Drucker, took credit for his company’s role in the presentation saying, “We’ve shown you today what FedEx can do. It can connect the world together by bringing mangoes to you”.

Long banned from the by US Department of Agriculture, Indian mangoes were only approved for import in late Ma as the Wire previously reported. There was no indication whether the mangoes presented to Rice were the Alphonso variety, highly prized by mango enthusiasts.

Picture by AP/Manuel Balce Ceneta

Towards Uniform Accounting…Can India Catch Up?

The WSJ reported, on June 21st, that the SEC unanimously voted to propose allowing non-U.S.-based companies to file financials using international financial reporting standards (IFRS) as set by the International Accounting Standards Board without reconciling the differences to U.S. generally accepted accounting principles (GAAP). This move is yet another indication from the SEC that it has duly noted the “flight of capital” from America’s markets to foreign exchanges, particularly London and Asia. The proposal is now open for public comment for 75 days at which point the SEC will deliberate the adoption once more and reach a final decision.

What this means for Indian based companies and India’s policymakers is, act now: 1) companies should voluntarily adopt IFRS as a routine method of reporting 2) the federal government should nationally adopt IFRS as the preferred method of reporting in addition to reforms in other areas of corporate governance with an aim towards making India’s markets more inviting.

With respect to some of India’s larger companies such as Infosys and HDFC Bank, the cause for urgency is less pronounced given that they have voluntarily adopted improved standards of accounting and corporate governance. In fact, the Asian Corporate Governance Association (ACGA) noted in its “country snapshot” that India is the only country in the region where the business sector, rather than the government, initiated corporate governance reform in an effort to attract foreign direct investments and increase the companies’ competitiveness, visibility and level of respect. However, the ACGA emphasized significant weaknesses in India’s regulatory infrastructure which fell into three categories: 1) lack of emphasis on enforcement and oversight 2) weak or non-existent protection of shareholders’ rights 3) a general pattern of corruption and aversion to inter-agency cooperation that characterizes Indian governance.

A leading expert on corporate governance and a professor of Finance and Control at the Indian Institute of Management (IIM), Mr. R. Narayanaswamy, echoed these concerns in an interview with The Hindu’s “Business Line“.  One natural consequence arising from a lack of cooperation is what he noted as a multiplicity of accounting standards arising from several competing bodies such as the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICAI), to name a few. Narayanaswamy is a strong proponent of adopting uniform international standards, strengthening domestic regulatory agencies such as SEBI and the Ministry of Company Affairs (MCA), and streamling their enforcement and oversight functions.

“‘I doubt if anyone is monitoring compliance. Both the SEBI and the MCA do not have the kind of technical staff they need.’”

In addition to its weak regulatory structure, India’s laws protecting shareholders’ rights are notably weaker than their American or even Asian counterparts. For example, as it stands now, shareholders are unable to sue their company’s management derivatively, on their company’s behalf for reckless management practices. Strengthening this area of the law is also critical to ensuring growth in India’s capital markets. Narayanaswamy cites the SEC of the U.S. as a strong model to emulate although he worries that future abuses by companies may jeopardize trust in the capital markets and lead to “horrible rule-based accounting standards.” In the States, Sarbanes-Oxley is viewed by many as exactly what Narayanaswamy fears may befall Indian companies.

For its part, the SEC is exploring ways for U.S. companies to report under international accounting standards by giving them a choice between U.S. GAAP and the IFRS. Critics worry this may provoke companies to cherry-pick the kind of reporting that casts their business in the most favorable light but proponents maintain that this will be a necessary step towards a convergence of global accounting standards. Whatever course the SEC may chart, prudence counsels Indian companies to heavily invest in tightening up their reporting mechanisms in accordance with IFRS regardless of whether Indian law requires it. Prudence also counsels New Delhi to take this latest move by the SEC as a signal to invigorate its own efforts towards reform. Promulgating stronger, across-the-board standards with effective oversight and enforcement will not only make India’s markets attractive for foreign investors but will increase faith in Indian-based companies (big and small) overseas, thereby making it easier for them to list in foreign exchanges for additional capital generation.

Starbucks Renews Effort to Enter India

Reuters reports today that Starbucks is revising a previously stalled application to enter the Indian coffee shop market. The news agency also cites the Business Standard in noting that the India’s Department of Industrial Policy and Promotion (DIPP) supports Starbucks’ entry into India’s “fast-expanding” economy through a “foreign direct investment route” since its previous (franchise) plan “did not conform to foreign investment norms”.

Reports on the details of the previous plan suggested that Starbucks’ Indian operations would be 51% owned by Indonesian Starbucks franchisee V.P. Sharma and the rest owned by Kishore Biyani, CEO of Future Group, a subsidiary of Pantaloon Retail. The DIPP was unwilling to approve this joint venture version of Starbucks’ plan because Sharma was a non-resident Indian.

In refiling its application, Starbucks is reportedly pursuing a franchise-based operation. According to Reuters:

“Foreign single-brand retailers can take 51 percent in a venture with a local Indian partner, while multiple-brand retailers are limited to cash-and-carry or franchise and license operations.”

Faced with rising material costs and lowered growth forecasts at home, Starbucks is keen to expand into both China and India.

Large Corporations Issue Report on How to Help Globalization’s “Losers”

The WSJ reported today that the Financial Services Forum (FSF), a non-profit/non-partisan group made up of CEOs of the world’s largest financial-services corporations, offered suggestions on what to do about workers “on the losing end of globalization”. Although similar concerns were raised by the OECD (and reported by the Wire here), the WSJ notes that the FSF report “marks one of the first times top business leaders have sought to weigh in collectively in the globalization debate”. Many of the companies represented within the FSF are worried that a public backlash against globalization could manifest itself in protectionist legislation and “the banking, investment and other CEOs who belong to the group have consistently cited protectionism as the leading threat to continued U.S. and global economic growth.”

The members of the FSF, including Lloyd Blankfein (CEO of Goldman Sachs) Stan O’Neal (CEO of Merrill Lynch), and Kenneth Lewis (CEO of Bank of America), noted in a statement that:

“Our open-trade and investment policies have significantly enhanced the economic well-being of American citizens, although not everyone has shared equally in the benefits of globalization.”

Along with this, the report offered the following positive statistics:

• Living standards in the US are $1 trillion higher per year because of globalization
  • This translates to a gain of $10,000 a year per US household
• If trade and investment is allowed to continue without restriction, annual US income could be $500 billion higher, with an additional gain of $5,000 a year per household

These developments were contrasted by evidence that:

• From the mid 1970s to late 1990s, the income growth of less-skilled workers in the US lagged behind “economy-wide productivity gains” as well as the income growth of “their more skilled counterparts”
• Since 2000 “the large majority of American workers have seen poor income growth”

In addressing these concerns, the report offered a wide range of policy suggestions. The WSJ noted:

“Its ideas range from the familiar — such as raising taxes on the wealthy to address income disparities — to the novel, such as insuring communities against “sudden economic dislocation” caused by a plant shutdown or other factors.”

Notable among these recommendations are the following:

• Merge all worker assistance (unemployment, wage insurance, and trade-adjustment assistance) into a single program
• Increase the progressivity of the overall tax system and ensure broader sharing of the benefits of America’s participation in the global economy
  • This would include elimination of the payroll tax for those earning less than the national average
• Policymakers should begin knitting individual free trade agreements into the basis for wider agreements
• Congress should significantly expand the resources available for enforcement of U.S. trade agreements
• Congress should limit the scope of inward investment reviews by the Committee on Foreign Investment in the United States.

Another area of importance touched upon is “one of the most frequently talked-about prescriptions for success in a global economy — improving workers’ skills through continued education.” Although the three economists who authored the report agree that education can have a role in reducing negative impacts of globalization in the future, greater training is deemed in adequate in its ability to address problems plaguing low-skilled Americans right now. Illustrating this, one of the authors, former Bush Administration economist and current Dartmouth College professor Matthew Slaughter, noted that “it has taken 60 years for the percentage of Americans with college degrees to grow to 30% from 6%.”

Apparently keen to see government consideration of its suggestions, the WSJ reports that the paper’s authors met with legislators this past Friday. However, the article cautions that “many of the paper’s recommendations are likely to be politically difficult to achieve.”

US Official Rips India for Failure of Trade Talks

As the Wire reported below, recent trade talks between the US, EU, India, and Brazil ended in failure as participants were unable to reach any comprehensive agreement. The dispute centered on the developing countries demands for reduced farm subsidies in the US and EU combined with the West’s insistence on greater access to domestic markets in India and Brazil.

In the wake of the Potsdam conference, senior negotiator and US Trade Representative Susan Schwab (pictured) indicated in an interview that she was “surprised” by India and Brazil’s “rigid negotiating positions”. Schwab felt that negotiators from these countries had been much more willing to compromise in previous negotiation sessions. Schwab speculated that the major reason behind this shift could be fears over trade deficits with China. Currently, India has a small trade surplus with China but there are concerns this may eventually become a deficit. In the interview she noted:

“There has been some backtracking [by developing countries] in the last two months because of concerns about China. Another factor is the sense that some of the more protectionist developing countries could hide behind the differences of others. It was only when the EU and the US made progress on agriculture that their positions were smoked out. They [Brazil and India] came to Potsdam with very rigid positions.”

Schwab also accused Brazil and India of selling out to other developing countries in order to find a common negotiation position, making it harder for their negotiators to be flexible when presented with offers by the US and EU:

“What you have seen is they spend huge amounts of time and political capital fighting it out internally and then they preclude their leaders [Brazil and India] from taking different positions – at Potsdam, Brazil and India were taking the same positions as they had almost two years ago.”

Although she expressed her disappointment regarding India and Brazil’s mutual inability to “provide leadership to the developing world” she was most critical of India, which many have accused of coming to the trade talks “expecting the negotiations to fail”. According to Schwab, India was able to get Brazil to choose “[developing country] solidarity over its economic interests”.

Photo of Susan Schwab from USTR

India’s Prized Right, at What Cost?

The U.S.-India civil nuclear partnership is in the throes of what one can characterize as labor pangs. The Hindu reported that officials from the two states are at an impasse regarding India’s right to reprocess spent nuclear fuel. The Hyde Act (discussed below), now being deliberated in Congress, is the enabling legislation for the nuclear partnership. In this bill, the U.S. would prefer to restrict India’s ability to reprocess spent uranium. A byproduct arising from this process is weapons-grade material. India argues that it has a right to reprocess fuel and has offered to place such a facility under “international safeguards”.  It further argues that the July 2005 joint-statement declaring the partnership contemplated such a right and that the U.S. now seeks to dilute it significantly. One way the Hyde Act attempts this is by requiring U.S. presidential certification for reprocessing a plant’s fuel. Not at all bashful, several high-level nuclear scientists in India have dug their heels in the ground and demonstrated a troubling fervor with which they’re willing to defend this right. One scientist quoted in the Hindu expressed his frustration with the Hyde Act and its implications:

“Here is another example that the U.S. remains bound by its terms and intends to invoke them to bludgeon India into agreeing [to the Act's terms]“.

Although India agreed to maintain a moratorium on weapons-testing, officials seem to want a stockpile of weapons-grade material as a safety net.

Pakistan Who?

In related news, the Guardian and several other news agencies reported that Pakistan is building a third plutonium reactor according to satellite images of Khushab, a town 100 miles south of Islamabad. Plutonium weapons pack a greater explosive charge than their uranium counterparts and are delivered in a relatively compact vessel. In a report authored by the Washington-based Institute of Science and International Security, David Albright, a former U.N. inspector, warned that this development should be viewed as an indication of Pakistan’s intent to accelerate its weapons proliferation and usher in a generation of enhanced nuclear strike capability. New Delhi shrugged off the report as another attempt by the partisan non-proliferation camp to stir up more controversey around the Indian nuclear partnership with Washington. A former director of India’s Institute of Defence Studies and Analysis (IDSA), K. Santhanam, was quoted in the Hindustan Times as saying,

“[The civil nuclear partnership] and suggestions of an arms race is a complete non-sequitur,–There is no connection with this and the Indo-US civil nuclear deal. This is part of the non-proliferation, ayatollah brigade jargon.”

 For its part, Pakistan maintains that it is pursuing this program for peaceful purposes according to an official who spoke to the Guardian on the condition of anonymity. In short, we can expect more of the same from both of these regional rivals who exhibited strikingly similar behavior while on the road to nuclear-weaponhood. Also present for this chapter is the United States and a flabbergasted Western world that can’t seem to squelch its hunger for money even when faced with the most perilious of circumstances. A word of advice to Washington- back away slowly or demand that all of India’s spent fuel, past and present must come under complete IAEA safeguards in order for the deal to go forward.

Pointing Fingers in Potsdam: Trade Talks Collapse

Trade talks between the US, EU, Brazil, and India ended today with each side blaming the other for the lack of progress. The WSJ reports that although the three-day event did not involve the participation of all 150 WTO members, the inability of the organization’s four most powerful parties to reach a compromise makes more a comprehensive trade agreement much more unlikely.

As with the Doha Round of trade talks, which began in 2001, the major area of disagreement on eliminating barriers to trade focuses on farm subsidies in industrialized nations and closed markets in developing countries.

For the part of developing countries, EU Trade Commissioner Peter Mandelson placed the blame on India and Brazil noting,

“It emerged from the discussion … that we would not be able to point to any substantive or commercially meaningful changes in the tariffs of the emerging economies, as a reasonable return on what we are paying into the round.”

Echoing this, President Bush accused India and Brazil of being more concerned with their own interests than helping more impoverished countries adding through a spokesman,

“[that he was] disappointed that certain countries are blocking an opportunity to expand trade and large economies like Brazil and India should not stand in the way of progress for smaller, poor developing nations.”

In response, Brazil Foreign Minister Celso Amorim and Indian Commerce Minister Kamal Nath blamed the US and EU for the talks’ collapse saying,

“It was useless to continue the discussion given what was on the table … This round is about trade flows from developing countries to developed countries, not the other way round [but the West was only interested in] perpetuation of the inequalities in global trade.”

The insistence of Brazil and India that farm tariffs be lowered has been problematic, particularly for the EU, which protects its farmers through high tariffs on agricultural imports. Similar difficulties have resulted from calls for the US to reduce its level of farm subsidies. Developing countries argue that both these policies result in a lower price for agricultural goods on the international market, negatively impacting their ability to achieve economic growth through greater exports.

Although officials reported that the EU had exhibited a degree of flexibility on the farm tariff issue, increasing a tariff cut on protected products from 60% (last offered in 2005) to 70%, India was unwilling to open its agricultural sector to greater foreign competition. Both Brazil and India offered significantly less market access than the US and EU had hoped for. Addressing this concern, US Agricultural Secretary Mike Johanns has noted that India’s proposal that 20% of its existing farm tariffs be left untouched would result in “an outcome [that] would shield up to 95% of what India imports from cuts”.

Although Foreign Minister Amorim described the failure as a definite “setback”, US Trade Representative Susan Schwab (pictured) noted that the US was not ready to “give up on negotiations”.

Picture of WTO OMC: ©AFP/File – Fabrice Coffrini

Picture of Susan Schwab: ©AFP/File – Eric Piermont

Indian Beer Magnate Signs $7.3 Billon Deal for 50 Airbus Planes

Since July 18th, the eyes of the aviation world have been fixed on the 2007 International Paris Air Show. As one of the most important trade shows for the industry, the two manufactures of commercial airliners, Boeing and Airbus, have been in competition to sign the most orders for their newest planes. Airbus has struggled recently as orders for its “superjumbo” A380 (pictured) have been eclipsed by the Boeing 787 “Dreamliner“. Additionally, the Airbus has been forced to redesign its upcoming A350 model, in response to potential buyers being drawn to the cost savings offered by the more fuel efficient 787.

However, the announcement by Vijay Mallya, owner of Indian carrier Kingfisher Airlines, of a purchase of five A340s, fifteen A350s, ten A330s and twenty planes from the A320 family, was welcome news for Airbus. Previously, Kingfisher Airlines had ordered five A340s and five of the A380 superjumbos. When the A380s are delivered in 2011, Kingfisher will be the only Indian airline flying the world’s largest airplane.

The purchase of such a large number of new planes is inline with Mallya’s plans to expand beyond the Indian domestic market. Currently the Indian government requires a domestic carrier operate for at least five years before flying abroad. Once these planes are delivered and Kingfisher wins government approval, the airline will be able to offer non-stop flights to the US. The A380 and A340 are only economical when used for long-range flights and Mallya plans to capitalize on this through direct flights to both East and West Coast cities in the US.

Often described as an “Indian Donald Trump”, the flamboyant Mallya is well-known for his leadership of the massive United Breweries Group, the second largest liquor conglomerate in the world. Along with Kingfisher Beer and Kingfisher Airlines, Mallya has acquired a variety of foreign companies, including the Bay Area microbrewery Mendocino Brewing Company.

A NYT piece on the purchase agreement appears here

“Reverse Outsourcing”

Sure there are one-way streets but no one can guarantee they’ll point the same way forever. So it is with outsourcing and in case Obama or any other presidential candidate wants to make a stop at the “trash-foreign-workforces-station” on their campaign trail, it would behoove them to examine job-flow trends past and present to reach a sound conclusion. In a June 19th article, The Hindustan Times quoted analyst John McCarthy of Forrester Research Inc (FORR) as saying, “The Indians are doing to the world’s IT processes what the Japanese did to manufacturing.” Indian companies such as Wipro, Infosys and the largest offshoring firm, Tata Consultancy Services (TCS) are increasingly hiring American workers in cities such as Austin, TX and Atlanta, GA where there are significant tech talent pools.

The companies cited several business considerations that justified the recent trend; 1) the need to hire local talent in order to satisfy local customers 2) the relative increased cost in shipping Indian workers to the States on H-1B foreign worker visas and providing temporary housing 3) the recent appreciation of the Rupee made hiring Americans cheaper and prospectively, due to stiff competition in India, tech-sector wages there are projected to increase 12 to 15% a year.

In sum, the Hindustan reports that Indian firms are poised to become “major employers in the U.S. economy.” Consider this in light of Nick’s recent posting on the OECD’s employment outlook report. The report expressed reservations about globalization’s adverse impact on low-wage workers in developed economies. If the idea is to keep low-wage workers at low-wage then globilization is certainly a serious policy concern for the OECD’s 30 members. On the other hand, if the idea is to move human resources to a higher state of utility and raise the low-wage sector’s standard of living, the serious policy concern should be how OECD’s member states can begin to satisfy the growing demand for skilled-labor that companies like Wipro, Infosys and TCS will inevitably present.

Don’t Ask Don’t Tell: “Rapid Spread” of HIV/AIDS Seen in Indian Armed Forces

Today the FT reports that there is mounting concern within the Indian Army over growing number of servicemen infected with HIV/Aids. Officials indicated that this problem should not only be the concern of the military as disease is being passed on to the unsuspecting wives of infected soldiers when they return home from active duty.Many of India’s military personnel are stationed close to regional insurgencies in the country’s northeast. Unfortunately, two states in this part of the country, Nagaland and Manipur, are also classified as having an abnormally “high-prevalence” of HIV/Aids infection.

The growing infection rate within the Indian Army (one of the worlds largest), is now seen to represent a major peacetime threat to both the military and the nation as a whole. An officer in the Assam Rifles (pictured), “India’s oldest paramilitary force”, noted over two years ago that more soldiers were being killed by HIV/Aids than by enemy fire in the north-east. The article goes on to explain:

“During peacetime, military personnel are up to five times more likely to contract sexually transmitted infections – including HIV – than the civilian population. In times of conflict, when soldiers are away from home for long periods, the risk is even higher.”

The Wire has recently reported (here and here) on India’s anti-HIV/Aids campaign. Although recent reports suggest progress has been made, the military does not keep official statistics on infected personnel. If New Delhi is serious about combating the HIV/Aids epidemic, it should do a better job of monitoring infection within the ranks of the Indian armed forces. Additionally, it should encourage efforts that the recent defense ministry campaign to educate the wives of soldiers regarding the threat of sexually transmitted diseases brought home by their husbands.