Wednesday, April 8, 2020

Why pharmaceutical MNC stocks are beating their Indian peers hands down

Why pharmaceutical MNC stocks are beating their Indian peers hands down

  • Pharma MNCs are riding on innovation and are operating in niche therapies where there is less competition
  • US FDA inspections leading to cancellation of some drug launches in the US market has now impacted most Indian companies
Stocks of multinational pharmaceutical companies have outclassed their Indian peers this year, and chances are they could continue to maintain their edge in the near future. An index comprising of seven MNC pharma companies delivered returns of 9.3% since April this year as compared to a drop of 13% drop in a set of 20 Indian pharma stocks, data compiled by Mint Research shows. That results in an outperformance of as over 25%.
A combination of high domestic growth and better products in the domestic market are some of the key drivers for MNC pharma stocks.
"MNC pharma companies focus on a few brand products and enjoy premium pricing on these products as they are restricted to the top-end of the market. They also are 100% focused on the India market where there is less regulatory risk and on growing fewer premium brands in the domestic market. Whereas Indian pharmaceutical companies have about 30% of their revenue coming from the domestic market, and the rest is from overseas businesses. This exposes them to regulatory, currency and geopolitical risks which has an impact on their performance," says Krishnanath Munde, senior analyst, Reliance Securities Ltd.
No doubt, overseas exposure did boost the prospects of Indian pharmaceutical companies a few years ago, but US FDA inspections leading to cancellation of some drug launches in the US market has now impacted most Indian companies.
MNC pharma companies, on the other hand, are riding on the innovation done by their parent companies and are operating in niches and therapies where there is less competition. This gives them an edge in the domestic market. "Some MNC pharma companies are into chronic therapies, which can persist for life, which is why MNCs command a valuation premium too," notes Munde.
Besides, these companies have traditionally had negligible debt on their balance sheets and better dividend payouts.
A drawback is that many of these MNC companies are not highly liquid or heavily traded, which results in a higher impact cost for investors who want to take large positions. As their stock prices have also run up significantly, some of these stocks are beginning to quote at astronomical valuations.
Astra Zeneca, for instance, quotes at a price-earnings multiple of 74 times trailing twelve- month earnings. Correspondingly, most Indian pharma companies quote at lower than 20 times earnings on the bourses. Hence, given the run up in MNC pharma companies and some lofty valuations, a health check-up of these stocks may do no harm.

Q&A: talking drug quality with Valisure, the first analytical pharmacy

Q&A: talking drug quality with Valisure, the first analytical pharmacy
By Allie Nawrat

Grounded on personal experience of complications from taking below par drugs, Valisure is the only pharmacy in the US that puts each and every batch of medicines it buys through rigorous chemical tests before selling them to patients. Allie Nawrat talks to Valisure co-founder and CEO David Light about the company’s business model and why it has taken on the responsibility of quality assurance.

                                     CEO : DAvid Light
In September 2019, the US Food and Drug Administration (FDA) recalled generic versions of Zantac (ranitidine) after impurities of the carcinogen N-nitrosodimethylamine were found in numerous batches being distributed in the US. Other regulators quickly followed suit and began to recall all generic versions of ranitidine.
The company that first discovered the carcinogens in Zantac and reported them to the FDA was analytical pharmacy, Valisure.
This is just one high profile example, but Valisure chemically tests every batch of every medication it buys to ensure that the drugs being sold are exactly as they should be before selling them to patients.
Looking generally at Valisure’s work, CEO and co-founder David Light explains why the company’s has stepped up to guarantee safe, high quality drugs are dispensed to patients, while other industry stakeholders have largely sought to place responsibility for drug quality assurance elsewhere.

Allie Nawrat: What motivated you and your co-founder Adam Clark-Joseph to create Valisure?

David Light: Valisure started when a good friend of mine from college, Adam, called me up one day and to tell me about all these problems he was having with his anticonvulsant medication. Every once in a while he’d refill his meds and that month he felt terrible side effects and sometimes relapsed. He talked to his doctors, who said: “Listen, these days, most drugs are made in India and China, and there’s a lot of variability, and [there is] nothing we or your pharmacist can do about it”. But he obviously didn’t like that answer, so called me up. My background is in technology development of biotech tools, and I have spent a long time [working on] DNA sequencing developments.
The reality is that the only time that medications are actually chemically checked is sometimes at the manufacturing stage, which is then self-reported to the FDA. Maybe that worked better when things were done more locally, but with everything going overseas, [there are] a lot of cracks in the system. So, we figured let’s just do the analysis at the pharmacy, the end of the supply chain.
Currently we are rejecting over 10% of batches we’re analysing; this for a variety of reasons, [including] dosage, dissolution of the pills, incorrect ingredients and problems with contamination.

AN: How do you ensure carrying out these tests doesn’t make medicines more expensive for patients?

DL: We developed a variety of proprietary technologies, which we have ISO accreditation for, to address some of the most expensive components of analysing what is in a pill. It is all for high throughput analysis of high precision and the lowest possible cost.
The other important component of the business model is that unlike most pharmacies, we buy large amounts of inventory up front; we don’t buy day to day or even week to week, we try to buy six months or sometimes even a year’s worth of inventory. This has some float risk, but this allows us amortise our costs over a larger batch. Combining the cost savings from our technologies with buying large amounts of pills ahead of time, we can actually have a very low cost per pill. So when we sell medication to the patient, we can sell it at no additional cost.
We have good enough relationships with the various distributors we work with where we can actually sample the batches before we buy. So if they don’t pass [our testing], we just don’t buy them;. But if they do pass, we buy a large amount of that batch.

AN: How have regulators, patients and the pharma industry responded to Valisure’s approach?

DL: Patients have been very engaged. We’ve had a many telling us that they’ve had numerous problems with their medications and so they don’t trust them. Now we’ve created this category of the validated generic, which this has resonated a lot with patients, particularly those taking psychotropic drugs, anti-epileptic drugs, antidepressants, [as these are] areas where people really feel the differences in their medications.
What’s also been really interesting is that doctors, pharmacists and pharmacologists are proud that we’re doing this. They have known for a long time that these problems exist – there are a number of professionals, such as doctors at the Cleveland Clinic and Joe Graydon of the People’s Pharmacy, who have been outspoken critics for decades – and now they are excited that we’re actually doing something about it.
Companies that are making the drugs in much more high-quality environments and processes have reached out to us [asking] about ways we can work together as an industry to shine more light on which products are quality and which are not. Currently, the way the regulatory system works is that as long as it is an FDA approved facility, then [it is presumed] all the medicines are the same, but we see that they are definitely not. This disincentives companies that are going above and beyond for quality as those who are cutting corners on quality and using very cheap solvents are making a lot more profit.
Regulators have been very open to working with us although the legal infrastructure for building out an analytical pharmacy is entirely novel. The FDA has inspected us to ensure we are independent from pharma companies and has also requested that we just take our information, data and send it back to the industry to alert them of problems.

AN: Whose responsibility is it to ensure drugs that reach patients are of the right quality?

DL: Honestly, one of the problems [with the current system] is that [responsibility for drug quality assurance] is so shared. For the most part this has worked, most drugs that we see are of high quality; overall the pharmaceutical industry has doubled the human lifespan and created amazing products.
However, in a self-regulated industry with shared responsibility, there can be serious cracks and unfortunately it seems that these cracks are only getting bigger. Everybody agrees that there are problems in the system and they were getting worse, but nobody wants to do anything extra to help.
Manufacturers, distributors, big pharmacies all say: “It’s not our responsibility to do more quality assurance”. But at Valisure we have taken on the responsibility ourselves, [we see it as] our mission to plug [those gaps] and achieve that core value of quality assurance in terms of medications to affect as many patients as possible. We do this at the end of the supply chain before it’s actually going to get to a patient or a hospital; that’s where it’s most important to look.
But there really needs to be more vigilance and more responsibility across the supply chain and throughout the healthcare industry; supported by regulation, but [there is no need] to wait for the rules to change [before taking action on drug quality], Valisure didn’t.

Friday, January 6, 2017

How the Badal Family’s Roadways Business – Orbit Transport – is Taking Punjab for a Ride

How the Badal Family’s Roadways Business is Taking Punjab for a Ride

The Punjab government has enriched private transport companies – most of which are owned by the Badals – while the state transport department collapses.

Punjab chief minister Parkash Singh Badal and deputy chief minister Sukhbir Singh Badal. Credit: PTI
Elections are around the corner in Punjab and in its final move, the incumbent Badal government has discreetlyinitiated a process of extending route permits and enhancing operational schedules of private bus transporters at the cost of state-run transport buses, whose operational timings are being cut and permits taken away.
This move is one in a series of manipulations over the past few years of the state transport policy that favours private transportation agencies at the cost of the the state-owned transport department and the people of Punjab.
The attempt to enrich private transporters does not come as a surprise since the father-son duo of Punjab chief minister and deputy chief minister, Parkash Singh Badal and Sukhbir Singh Badal, directly own over 60% of the state’s private bus services. The business, which began with 10 buses in 2007, now runs over a thousand buses including a few hundred luxury coaches.
The family most recently acquired two more private transport agencies based out of Hoshiarpur – Rajdhani Express and Azad Hoshiarpur – and with it added another 120 buses to their already swollen kitty.
The other companies of the Badal clan have also applied for an extension of routes and increase in daily trips in the area. Interestingly, the state transport commissioner, on the other hand, has curtailed the operational time of state transport buses originating from Hoshiarpur by over 700 minutes.
A labyrinth of Badal’s transportation companies
The Badals have built a gigantic business empire with interests cutting across various sectors – transportation, media, liquor, hospitality and non-conventional energy, amongst others. In fact, in the road transport business alone, they control at least six different companies with annual revenue running into a few 100 crores. The businesses are orchestrated through a small group of family loyalists who hold top positions in their business ventures.
The flagship company of the Badals – Orbit Transport – quite literally acquired wings after it merged into Orbit Aviation, a company which was incorporated only three months after the Akali-BJP government came to power in the state in 2007. The directors of the company include Sukhbir’s brother-in-law, Gurmehar Majithia, and two other family loyalists, Mohammad Jameel and Mohammad Rafiq. In 2012, Sukhbir’s holding company, Orbit Resorts Pvt. Ltd – which runs several five-star hotels – acquired control over it and now owns a majority of the shareholdings. Orbit Aviation is the leading private transporter in the state today with the most number of route permits and buses.
Interestingly, the brother duo of Jameel and Rafiq also appear as directors in the Badal-owned Dabwali Transport Company Limited. While Sukhbir owns a majority stake in the company of 99.74%, other family related businesses are investors in it.
Documents from the Ministry of Corporate Affairs reveal that when combined with Orbit, the two companies earned an annual revenue of over Rs 150 crores in the last financial year. Jameel and Rafiq also appear as directors in at least 10 other business ventures operated by the Badals.
Another company controlled by the Badals is Taj Travels, that runs luxurious Mercedes Benz coaches in the state. The majority shareholding of the company is by another family loyalist, Lakhvir Singh (97%). He and one Jagpal Singh appear as the directors of the company.
Not only does the balance sheet of Taj Travels feature the private residence of Badals and land in Badal village as the fixed assets of the company, there is also clear evidence of multiple financial transactions of the company with other business ventures of the Badals.
Lakhvir and Jagpal are directors in two other major transport companies – Shan-e-Punjab Transport and Hargobind Travels – that are also backed by the Badal family. The two of them also appear as directors in other business ventures of the family including the recently acquired Indo-Canadian Transport Company which enjoys a monopoly service to the Indira Gandhi International Airport in Delhi.
The establishment of this monopoly is an intriguing story in itself. Indo-Canadian Transport has been profiting from a route which was marked as ‘non-viable’ by the state government in 2012. The government-owned Punjab Roadways initially began the service in 2010 to connect the NRI-rich Doaba region of Punjab with Delhi airport. The Volvo buses belonging to the state were, however, hastily withdrawn from service – leaving Indo-Canadian as the sole player.
This decision left everyone baffled because not only was the route popular among passengers but the transport department was also making a good profit from it.
Allegations from the Punjab Roadways Employee Union and Punjab Government Transport Workers Union suggest that the transport department was forced to withdraw its services after the Badals took over ownership of Indo-Canadian Transport Company in 2012.
The popularity of the route can be assessed from the fact that Indo-Canadian plies over 10 buses on the route every day. While Punjab Roadways charged a nominal Rs 650 for a single ticket, the private company jacked up the fare to Rs 2600. The passengers were left with no other option but to shell out the extra money.
Tweaking state transport policy to benefit private operators
The Badals have often manipulated rules and used government machinery to consolidate their clan’s business empire. Three months after coming to power in March 2007, the Akali-BJP government started issuing permits for luxury buses to several private companies, including many of their own operators.
Three months later, in November, the government relaxed the taxation structure for the transport industry. The new tax policy, however, had the oddest of anomalies – the costlier the bus, the lower the tax to be paid.
While the passenger fare of luxury buses was double that of the ordinary buses, the formula of calculating the Motor Vehicle Tax (MVT) was contrary to it. The MVT on ordinary buses was reduced by a mere 25 paise to Rs 2.25 per vehicle per km, but the tax on luxury coaches was reduced from Rs 7 to a mere 50 paisa per vehicle per km – a 93% drop in the tax rates.
Furthermore, luxury buses were given a tax exemption for 150 days, compared to a 50-day tax exemption for the regular ones. The disproportionate cut in the tax rate shifted the revenue from the state transport department – which owned a majority of regular buses – to the private transporters who operated most of the luxury buses. The demand for luxury travel multiplied in the state because of the steep fall in ticket prices.
The buses of the Badal family also enjoy preferential treatment in terms of prime routes and timings. A driver of a bus operated by the state-run Punjab Roadways, who did not wish to be identified, accused the private operators backed by ‘political rulers’ of muscling into the timetable to obtain the best timings during the peak hours. He also revealed that the timings were manipulated to ensure that these private operators get more time to sell tickets at the counter.
A perusal of the timetable reveals the manner in which state transport buses are scheduled before and after private buses. State transport sources say it is an open secret that the two government buses would invariably fail to show up on time, hence giving more time to the private operators at the counters. Master Mohan Lal, when he was the transport minister in the Badal government, not only admitted to such practices but also alleged that the crew of many state-owned buses colluded with private operators in missing schedule timings and carrying a low passenger load.
In fact, it is a common scenario at the bus stands in Punjab that while a government bus would get only a two to four minutes stop at the bus counter, buses owned by the Badals were allowed to wait until filled to capacity. A few other drivers also complained of musclemen being employed by private operators to ‘hijack’ passengers from government buses to the private ones.
*No official data available
The presumptuousness of the Badal family
It has become an unwritten rule in Punjab that the police will not register an FIR against a bus operated by the Badal family even in cases of grave offences. In May, the Punjab police refused to file a complaint against the driver and conductor of an Orbit Aviation bus when a 13-year-girl died allegedly after being raped inside the bus in Moga.
After a media furore, the police was forced to act; however, the Badals ensured that the family members of the victimturned hostile in court. This should not come as a surprise considering the fact that the Badals were able to turn 137 witnesses hostile in a disproportionate asset case filed against them in 2010.
The government has also adopted several other mechanisms to wreck the state transport machinery. An amount of Rs 43 crores was allocated to start 225 new buses during the annual budget this year, however, not a single penny has been released till date. Surinder Singh, the convener of the Punjab Roadways Employees Joint Action Committee, recently mentioned that the state transport department was left with only 1,690 buses against the minimum fleet of 2,404 buses guaranteed by the Punjab government.
Delays in the introduction of railway links between major cities of Punjab have also been blamed on the powerful bus transport lobby. For instance, 30 years after the work first started, the government has failed to connect the hundred kilometres between Ludhiana and Chandigarh. Other important missing rail links include Bathinda-Amritsar, Barnala-Mansa and Amritsar-Anandpur Sahib. In the absence of railway connectivity, people are forced to travel by buses that are not only more expensive but also relatively unsafe and uncomfortable.
Private operators have further exploited the loopholes in the current transport policy to access the more profitable routes of the state transport department. A common strategy is to pick multiple permits for shorter routes and later tweak the rules to get them transformed into a longer and more profitable permit.
Many government drivers and conductors told this writer that the powerful private operators evade taxes and mandatory charges and operate multiple buses on a single permit. An investigation by a Punjabi news channel, Day and Night News, also revealed that several private buses were run on the names of indigent persons who neither had the information nor the resources for the same.
The systematic manipulation of Punjab’s transport policy by the Badal government over the years has resulted in a remarkable growth for private transporters while leading to a structured collapse of the government transport department. Not only has the state department suffered a drop in the total kilometres traversed by their fleet but it also saw a fall in the number of permits and buses owned. Although the department faces an accumulated loss of over Rs 460 crores today, the real loser has been the common public, at the cost of whom the coffers of a few are being filled.
Lovish Garg is a student at the NALSAR University of Law, Hyderabad.
Source : ; Lovish Garg

Thursday, August 25, 2016

BF Utilities jumps 18% as Deve Gowda withdraws opposition to infra project

BF Utilities jumps 18% as Deve Gowda withdraws opposition to infra project 

BF Utilities, a part of the Baba Kalyani Group, surged as much as 18 per cent to Rs 609 on Wednesday after former Prime Minister HD Deve Gowda decided to withdraw his protest against the Bengaluru-Mysuru Infrastructure Corridor (BMIC), a pet project of BF Utilities. The stock, once the fastest value creator between 2004 and 2006, has stayed on the sidelines due to political and legal battles

Shares of BF Utilities surged a mammoth 13,480 per cent in two years from Rs 25 in November 2004 to an all-time high of Rs 3,395 in November 2006. After six years of successive losses, the company reported a consolidated net profit of Rs 121 crore for the financial year ended September 2015 and a 118 per cent jump in income to Rs 519 crore. "I don't have any idea why Mr. Gowda made that statement suddenly. But on 29th August there is Supreme Court hearing. The court had asked us to settle the matter outside but that has not happened. So we will be going to the court anyway," said Ashok Kheny, managing director, Nandi Infra Corridor Enterprise, a subsidiary of BF Utilities.

The stock is trading at a price-toearnings multiple of 35 times its trailing 12-month earnings, a discount to peers like Sobha Developers and Puravankara. But analysts are not convinced about the growth prospects. "Though the company has a huge land bank, but the stock is highly speculative," said G Chokkalingam, CEO, Equinomics Research and Advisory. "I would not recommend to buy this stock as many other quality real estate players are available".

After a nearly 13-year struggle, Deve Gowda decided to distance himself from his relentless campaign against the BMIC project due to poor health and disillusionment, The Times of India reported on Wednesday.

BFUL is an integrated infrastructure developer engaged in the development of the Bengaluru-Mysuru Infrastructure Corridor, one of the largest integrated infrastructure projects in India entailing the development of a 111-km expressway, 9.1-km link road, 41-km peripheral road and 5 townships along the expressway.

Gowda launched a series of campaigns demanding a CBI probe into irregularities in the project and pressuring the government to withdraw the excess land. The company has sole and exclusive right to develop BMIC, which will comprise expressways, self-sustaining townships and other large mixed-use developments. In addition to the BMIC Project, the company owns and operates the Hubli-Dharwad Bypass Road and a 18.33-MW wind power project in Satara district in Maharashtra. 

Source : http://economictimes.indiatimes.comBy Rajesh Mascarenhas & Jwalit Vyas 

Why Narendra Modi should announce a mayor for Mumbai

Why Narendra Modi should announce a mayor for Mumbai

Mumbai is the world’s sixth-largest city, with a population more than several countries, including Australia, or three times the size of London

A file photo of Prime Minister Narendra Modi. Photo: PTI

Newspaper reports suggest that Prime Minister Narendra Modi is likely to campaign for the 2017 elections to the Brihanmumbai Municipal Corporation (BMC). Clearly, running India’s second-largest city matters to Modi’s Bharatiya Janata Party (BJP). A win could strengthen the BJP’s political position with a difficult regional ally, the Shiv Sena. It could also build credibility with 22 million Mumbaikars (and citizens in other cities), if the planned investment of Rs.1 trillion rejuvenates the city, creates jobs and expands incomes.
The incumbents will fight hard to retain control: the city defines their identity and BMC’s mammoth annual budget of Rs.37,000 crores gives them heft. So what could the PM offer that will help his party win in a city of sceptical, apathetic voters (38.4% voted in the last municipal election)?
For one, he could offer a new approach to run the city: an elected political mayor with a tenure of five years, empowered and accountable to fix the city. Why is this needed? For starters, Mumbai is slowly dying and fixing it needs more than investing in a few projects.
It is the world’s sixth-largest city, with a population more than several countries, including Australia, or three times the size of London. It contributes 30% of income tax and 60% of custom duty. Migrants still flock to it, women feel safer in Mumbai than in any other Indian city, and communities come together for everything from Ganesh Chaturthi to street cricket.
Infrastructure is creaking but trains and buses mostly run on time. It also has the most exciting redevelopment plan in India (16.5 acres by the Bohra community).
Yet, the city is in decline, and losing the battle for jobs and capital. Since 1991, while its population doubled to an estimated 22 million, its design has largely remained unchanged, stressing the legacy set-up. With the sub-optimal experiment to create another business district in Navi Mumbai, it remains a north-south city, putting disproportionate pressure on the suburban train infrastructure, increasing transit time for the average citizen and making homes unaffordable. Land use remains static and no new land has been released.
Quality of life has deteriorated with inadequate investment in affordable housing, transport, water, sewage and storm-water drains, especially in the suburbs. The city is routinely hit by flooding, rising pollution and drug-resistant diseases.
Mumbai also seems to have lost some of its appeal due to the high cost of living or doing business. A look at its roster of corporate residents confirms this. While it remains the headquarters of older companies and banks, most start-ups tend to prefer Gurgaon or Bengaluru.
Mumbaikars are also voting with their feet. The island city has seen its gross domestic product (GDP) shrink as talent prefers jobs in suburbs, where they can afford to live, which in turn forces companies to move out of South Mumbai.
So what can be done to save the metropolis?
For starters, there is a critical need for a ‘blueprint’ to improve citizens’ quality of life: projects to improve transportation, resilience and security. Also needed is a plan to renew land use: unlock tracts of government-owned land (such as the Mumbai Port Trust and reclaimed land), design multiple cities within the metropolitan area and tailor floor space index to drive desired density. Indeed, committed citizens and bureaucrats are currently debating Mumbai Development Plan 2034.
There is also a need for an ‘economic’ story to attract investors: articulate Mumbai’s role in the economic growth of India, the kind of jobs it wants to attract and the quality of infrastructure and policies it will offer to de-risk business.
Finally, the new mayor needs to engage citizens (especially the young) and align political parties using a compelling ‘political’ story. This is essential to balance the short-term election imperative (state and BMC elections every five years) with a renewal plan that will bear fruit over 15-20 years.
While the ‘what’ is clear, the ‘how and who’ remain the challenge.
Fixing Mumbai needs a deft, trusted political leader accountable for this renewal. Why? A look at the ‘jobs to be done’ makes this obvious.
To execute this plan, the leader will raise funds (use public land and debt, raise and collect fees for citizen services provided, fight for central and state grants), allocate capital sensibly (finalize projects and sequence them ensuring equity across wards, the rich and the poor) and ensure project execution (create audited books of account, hire private partners and agencies, coordinate across the corporation, re-organize where required).
He or she will need to ‘sell’ this story to investors and citizens. This is not the job for the best of bureaucrats. These officers have short tenures (transfers every 2-3 years), cannot take risks (the spectre of the Comptroller and Auditor General of India) and can get crushed between political parties. Clearly, this job is best done by a political representative of the people, with a clear mandate to make choices on their behalf.
Cities know they need leaders. Global cities elect mayors, some of who eventually run countries (e.g. Indonesia, Italy, and Philippines). Indian law too recognized this via the 73rd and 74th constitutional amendment almost two decades back. Indeed executing this is a state subject.
Some attempts have been made: Kolkata has an effective mayor-commissioner model while Chennai flirted with an elected mayor for a few years and Bengaluru got a city minister last year. But this law remains largely on paper due to missing political will.
Perhaps state leaders are uncomfortable with giving someone control over ‘valuable’ urban land or worry about creating city leaders, even when this might be the best approach for a cadre-led party to create local leadership (as the Chinese communist party realized 30 years back).
So when he campaigns in Mumbai, PM Narendra Modi could take the lead by encouraging state leaders to announce a candidate for the city’s mayor, who would be empowered and made accountable. An owner with a long-term view is the best bet to kick-start the long journey to renew Mumbai. And the PM could win the 2017 battle for BMC and the 2019 war for India.
Ireena Vittal is a former partner at McKinsey & Co. Her areas of specialization include emerging markets, agriculture and urban development.

Source :; IreenaVittal

Fear Not – July 2016 is not Dec 2007

An idiotic idea that worked

An idiotic idea that worked
For all policymakers, D. Subbarao’s book is a must-read as it provides them lessons on how to navigate in tough times
Ajit Ranade

Former RBI governor D. Subbarao. Photo: Abhijit Bhatlekar/Mint

Rare is the governor of a central bank who pens his memoirs soon after leaving his corner office. Former Reserve Bank of India (RBI) governor D. Subbarao’s bookWho Moved My Interest Rate? is exceptional not just because it comes barely three years after he left Mint Street, but also because of its lucidity and plain speak. It chronicles the turbulent times between 2008 and 2013 when Subbarao headed the RBI.
It was baptism by fire for him, as Lehman imploded within 10 days of his taking charge, leading to the global financial crisis, and much turmoil in India as well. The RBI had to resort to several unconventional actions to protect India from contagion, to calm the markets and ensure some stability. Just as that crisis was ending, the challenge of combating high and persistent inflation in India surfaced. Coupled with that was record high trade and fiscal deficits, and consequent rupee depreciation. To cap it was the rupee panic of 2013 caused by the talk of the tapering of US Federal Reserve’s monetary stimulus. Thus all five years of Subbarao’s tenure were marked by difficult challenges to financial stability, inflation or the exchange rate. His book is a jargon-free primer on the challenges of central banking in a world of turmoil often caused by factors beyond the country’s borders. His emphasis on plain speak was evident even during his tenure, as in his book, as he maintained that his mission was also to demystify the RBI and its functioning.
One of the most interesting, and by the author’s own admission, most difficult to write chapter, is called the Rupee Tantrums. Exchange rate management requires “real-time” decision-making, unlike inflation control. It also entails expectation management, or else currency crisis can be caused merely as a self-fulfilling prophecy.
The currency crisis of 2013, in wake of the taper talk, was unprecedented because India was among only a handful of countries called the “fragile five”, facing acute currency pressure. To stem speculative attacks, India tried everything from hiking interest rates to partial clamping down on dollar outflows. Nothing seemed to be working, perhaps not even an outright ban on import of gold (which thankfully was not tried).
At a recent discussion on the book, incumbent RBI governor Raghuram Rajan, who was then an officer on special duty in the RBI, recounted that among all the ideas in 2013 was also an “idiotic one”. This was to entice dollar inflows into India, by offering subsidized protection against rupee depreciation. This would provide comfort to foreign investors. The forward cover (or full insurance cost) on the rupee-dollar was about 7% per annum, of which the RBI could cover 3.5%. Assuming an inflow of $10 billion, over a three-year period, this could easily cost the RBI and the exchequer between Rs.10,000 crore and Rs.20,000 crore. Seemed like a crazy and expensive idea. But slowly it gained traction, since if the rupee didn’t stabilize, the nation would lose much more by way of a higher import bill. For instance, a Rs.4 fall on an import bill of $400 billion leads to an extra outgo of Rs.1.6 trillion. So, reluctantly, Rajan signed on to the crazy idea. And lo and behold, this turned out to be the prize-winning trick. The nation received more than $30 billion. Not only did the rupee stabilize and strengthen, but three years later, the RBI ended up making a profit on its forward deals. It had shored up adequate reserves in forward purchases to provide for the repayment that will be due next month. So, an idiotic idea worked because it was an intelligent gamble, which paid off.
It was Subbarao’s magnanimity to let Rajan make the announcement of this dollar scheme in 2013. And Rajan, who got much credit for saving the rupee, was humble and gracious to admit that he initially thought the idea was idiotic. The noble actions don’t just speak about the personalities, but are also the hallmark of the institution and its maturity, which at 81, is older than the republic!
One lesson of this “idiotic idea” can be considered for setting the basic rate for the goods and services tax (GST). What if we consider a lower GST rate, say 15%? The fear of lower tax collection can be offset by the reimbursement, or insurance scheme (much like the RBI had offered insurance against rupee depreciation). So, states that might have a revenue shortfall will be fully reimbursed by the centre. Given the buoyancy in collection, and an extra 1.5% growth in gross domestic product, we might all be in for a pleasant surprise. This is just like how the RBI surprisingly garnered three times the dollars it had anticipated. This low GST rate too will provide a post-facto vindication of a gamble that works.
It is an intelligent gamble, whose odds improve much like a self-fulfilling prophecy. Undertaking the gamble itself improves its odds. In a broader sense, much of policymaking involves a gamble, but if done intelligently, can assure desired results. If the reimbursement to states is avoided because it might breach the fiscal deficit target, that too is a gamble worth taking.
Subbarao’s book is a must-read for all policymakers, as it provides them candid insights and useful lessons on how to navigate tough and unpredictable times. He was amused to learn that Who Moved My Interest Rate? is sometimes kept in the ‘self-help’ shelves of bookstores. Maybe that is just as well, as central bankers will testify!
Ajit Ranade is chief economist at Aditya Birla Group.
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Monday, July 4, 2016

Living in smart city may cost more as Centre plans to capture value from infra spend

Living in smart city may cost more as Centre plans to capture value from infra spend

Living in a smart city or near a newly planned national highway or airport? You may have to pay more taxes. Based on directives from the Prime Minister's Office, the Centre is preparing a policy on value capture financing (VCF) aimed at helping the government recover some of the premium that public infrastructure investments generate for private landowners, top officials said. 
The PMO has formed a high-level committee to examine various aspects of the policy and conduct stakeholder consultations. 

The committee headed by Urban Development Additional Secretary Sameer Sharma includes joint secretaries from infrastructure ministries such as road transport, ports, civil aviation and economic affairs. According to sources, the consultations will be held in August and the policy finalised by October. 
The public financing tool, which is popular the world over, is based on the logic that the government makes large investments in developing public infrastructure leading to rapid economic development in those areas, including higher land prices. 

A policy on value capture financing would mean tapping into this increment through additional taxes, government as-realtor and other tools and then using finances to fund future infrastructure projects in the same area. 

The policy will propose VCF tools that can be used by the Centre and states. Initial discussions within the government reveal that in the case of major projects like a new port, airport or national highway, the public-private partnership agreement would include a VCF tool best suited to this. 
"Since the government does not recover this unearned increment from its own investments, it is constrained to initiate these big-ticket projects," said a senior official who didn't want to be identified. 

"So it is really in the larger public interest to have such a policy." 
Some of the models likely to be incorporated in the policy include tax increment financing. 

This means that if a port project or an airport is planned in an area, a tax increment on properties in the surrounding areas is imposed. 
This new levy will be for a specific period of about five years until property prices plateau. Some countries have identified special assessment districts that fall in the best-effected zone of an infrastructure project like a metro line. 
These have to pay an additional tax to recover the cost. Other options include the government initiating land pooling and developing only a part of this. When property prices rise, the government sells the rest of the land at a premium. 

Sources said the need for a policy has been felt since the government has initiated massive urban and rural development projects such as smart cities and urban renewal missions and this would be a way of recouping part of the investment. 

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