Beijing deflated by Inflation

IIPM - Admission Procedure

Chinese inflationary trends may hit the domestic and global consumer hard

In a democracy when the people are unable to bear the burden of ever increasing living costs, they retaliate by voting out the government and throwing out the politicians who fail to manage the economy on their behalf. But what do people in a dictatorial set-up like China do to give vent to their thoughts on the government’s apathy? In a totalitarian regime people keep accumulating their anger and burst out one day bringing about a revolution.

And now, when the annual inflation rate has more than tripled since last year to 4.8% and is expected to touch 6.8% in the current year, experts feel that it is becoming increasingly difficult for the Chinese Political bureau to strike a right balance between protecting the economic growth and ensuring public support to metamorphose completely from communist to capitalist modes of production. The big challenge is to make the process inclusive and not to alienate the common man. And the fear stems from the fact the growing burden of rising prices of essential commodities could destabilise the political set-up. “It’s better to nip inflation in the bud, but politicians’ concern is that if they take it seriously, it shows they haven’t managed the economy well. It might open them to criticism from political opposition within the party,” says Albert Keidel a former Beijing-based senior economist for the World Bank. It is not that the Chinese government has not taken steps to curb inflationary pressures. Premier Wen Jiabao has promised to keep keep this year’s consumer price index (CPI) increase at around 4.8%.

But the global economic situation coupled with high transportation costs is just not helping them to mitigate inflation. Furthermore, growing prosperity is creating consumers, eating humongous amounts to push up the demand.

The Chinese President Hu Jintao’s dream of constructing a “harmonious society” through higher wages and better health care system may prove to be an ineffective political risk management strategy, if inflation continues to spiral. Global economists too are worried about the Chinese inflation, as higher living costs in China will eventually lead to much higher costs of products being exported from China.

B&E edit bureau: Atul Bharadwaj

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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Fashion means business for WLIFW’s patron Gautam Rakha

“T o have a fashion week of its own is a matter of pride for a country. In fact, our fashion industry is not only taken seriously in India but also at several places across the world. Our fashion industry is definitely progressing in the right direction. But on any given day, when I think of the two fashion weeks in India, I consider the Delhi based Wills Lifestyle India Fashion Week (WLIFW) as a more serious affair than the Lakme India Fashion Week (LIFW). This is because WLIFW is not only more global in terms of the buyers who come from across the world, but also in terms of the models, press and media coverage. However, LIFW is mainly for Mumbai based designers. While I prefer WLIFW over LIFW, I have a reason to back it up with. It is because every designer who is pursuing fashion seriously and is considering international parameters is a part of this fashion week. All those who participate in WLIFW are taken seriously by the media as well. For instance, people like Manish Arora and many other famous designers participate along with me.

I don’t know about LIFW but WLIFW is continuously evolving. In fact, it is evolving as a ‘buyers’ first’ kind of market place. After considering feedback from the buyers, ‘affordable lines’ are the focus of most of the collections these days. We create designs as per their requirements. On several occasions, these requirements can be stated overtly by the buyer and many a times, I keep certain inherent requirements of their culture and climate in mind too. WLIFW is moving ahead and will reach greater heights sooner than we can imagine. Not that it hasn’t already!”

Swati Hora and Gauri Pratap Singh

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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He Likes to Rethink Afresh

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Rather than letting policy tangles halt its growth progress, RIL ‘quit India’ and eyed the world as the market for its refinery products, writes NARESH MINOCHA

This is the case of a conglomerate that was initially not allowed to sell some of its products directly in the domestic market. This is also the case of India’s most influential business house that was later allowed to sell its products without receiving any subsidies from the government, but had to compete with government-subsidised products that were sold by the state-owned units. In normal circumstances, what would a promoter in such circumstances have done? Close down the particular manufacturing base, or register it as a sick company with Board for Industrial and Financial Reconstruction.

Most entrepreneurs would have opted for either of these solutions, both in the global and domestic arena. But then, one can’t expect the Mukesh Ambani-owned Reliance Industries to behave like any other company. After all, it has influenced policy-making in this country for decades. Faced with such hostile policies and regulatory environment, RIL decided to ‘secede from India’ and look at the world as its market. It decided to export the products manufactured at its 33 million tonnes per year refinery at Jamnagar, Gujarat. After over six years of lobbying, RIL did the unthinkable in April 2007. It transformed its refinery & the adjacent petrochemicals plants into an export oriented unit (EOU). Although EOU policy allows companies to sell half their produce in the domestic market, RIL exported 60% of its refinery products valued at $6.99 billion in the first half of 2007-08. The changeover to an EOU, along with its export focus through SEZs, constitute an interesting study of an entrepreneur, who turned policy discrimination at home into a global business opportunity.

For years, both policy makers and experts contended that an EOU refinery was not viable as it was impossible to do the 20% value-addition to imported inputs as was mandatory under the rules. In fact, the government had rejected applications in the 1990s on the grounds that these projects lacked capability to attain the minimum value addition. But it approved eight EOU refineries that showed the capabilities to do so. Till today, none of them have seen the light of the day, or are seriously talked about.


Now look at what RIL did. Prior to transforming the Jamnagar refinery-cum-petrochemicals complex as an EOU, it floated Reliance Petroleum (RPL) to set up a 27 million tonnes per year refinery, along with a 90,0000 tonnes per year polypropylene (PP) plastic plant at the same site as an SEZ. Although the current SEZ scheme does not stipulate any value-addition norms, setting it up binds the promoter to export commitments, at least to maintain foreign exchange neutrality. For RPL, it meant higher exports of refinery products & petrochemicals.

In October 2007, RIL unveiled a proposal to set up a refinery-linked-petrochemicals complex to produce 2 million tonnes of olefins annually, including daily-use plastics. It also announced a proposal to set up the world’s largest integrated combined-cycle coke gasification complex within the SEZ to produce power and petrochemicals. The plan was to invest Rs.600 billion on the SEZ. According to a recent project report, the proposed SEZ complex has the potential to earn a net foreign exchange of $23-26 billion over a 10-year period. The figure does not include export earnings of the Jamnagar EOU in the past seven years. It clocked Rs.64.10 billion in exports in the first year of its operations in 2000-01. And today, it has emerged as India’s largest manufacturer-exporter. All this leads us to a few basic questions: would RIL have achieved this feat if it had the freedom to market its refinery products in the domestic market? Would it have amplified its global vision for exports subsequently?

The answers to the questions can be traced to policies for dismantling controls in the oil & gas sector notified on November 21, 1997. Under them, controls were to be phased out by March 31, 2002. On February 26, 1999, the Ministry of Petroleum & Natural Gas took note of refinery projects proposed by Reliance & Essar Oil Limited (EOL). The ministry stated that “RPL/EOL would be treated at par with other PSU/JV refineries… in the matter of off take of their controlled products during the transition period.”

Surprisingly, the ministry changed its assurance the next month. In a communication to the two companies on March 19, 1999, it stated that RPL/EOL would solely be responsible for the sale, including exports of surplus quantity, of the refinery products. “Any under-recovery/loss in such exports will be borne by RPL/EOL itself,” it added. The ministry also facilitated an agreement between RPL & IOC for domestic marketing of price-controlled products during the transition period as well as after that.

Under the marketing agreement, the ministry decided that Reliance’s production of five price-controlled products would be uplifted by IOC, Bharat Petroleum and Hindustan Petroleum in the ratio of 50%, 25% and 25%, respectively, during the transition period. In reality, the latter two state-owned firms never signed any formal agreements. Thus, Reliance was at the mercy of public sector marketing firms. The ministry made Reliance wait for three years to grant it marketing rights for sale of petrol & diesel.

This increased pressure on Reliance to step up efforts on the exports front. In addition, Mukesh decided to set up his own chain of retail outlets. Reliance currently has 1,423 outlets, but they are finding it difficult to survive as they have to sell at prices higher than the subsidised prices of state-owned marketing entities. Reliance keeps referring to the lack of a level-playing field, but, for once, has been unable to convince the policy makers. Reliance managers admit to have been making “representations for compensation at par with PSUs to offset retail losses.” But it seems to be in vain.

So now, RIL plans to acquire retail assets abroad to add muscle to its export efforts. It made its first acquisition in September 2007 with Gulf Africa Petroleum Corporation. Ironically, , it seems that failed reforms in the oil sector have helped an Indian firm think globally.

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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