The Indian rupee’s recent roller-coaster ride has impacted virtually every section of society. It has hit the country’s finances, eroded investor confidence, pushed down stock indices, pumped up fuel prices and, in turn, those of essentials. The rupee’s slide is symptomatic of the concerns about the India story. Months of policy paralysis, political churn and social standoffs have taken their toll. It is in this backdrop that senior journalist Subhomoy Bhattacharjee analyses the prospects of the rupee in the cover story of the August edition of PAR, MSLGROUP India’s public affairs newsletter. Another senior journalist, Kandula Subramaniam, puts into perspective the power crisis the country is up against and the dilemma state electricity companies are facing. Additionally, you'll also find an analysis of India's bold food security law as well as an update of important policy announcements and reviews in this issue.

1. PUBLICAFFAI
PUBLICAFFAIR
PUBLICAFFAIR
PUBLICAFFAIR
MEDIA
GOVERNMENT
ECONOMY
ECONOMY
NFLATION
INFLATIONPOLICY
POLICY
AIRASIA
AIRASIA
AIRASIA
CRISIS
MANAGEMENT
CRISIS
ANAGEMENT
OPPORTUNITY
OPPORTUNITY
COMMUNICATION
ORGANISATION
ORGANISATION
INVESTMENT
INVESTMENT
INVESTMENT
Public Affairs Round-up
MSLGROUP INDIA
August 2013 | Vol 1 | Issue 2
Will the rupee end the year above 60 to the dollar? Pg. 2
Fall season for the rupee Pg. 4
Dark times for the power sector Pg. 5
Policy Updates Pg. 7
Policy Roadmap Pg. 8
Number View Pg. 9

2. 2
Will the rupee end the year above
60 to the dollar?
headed and how fast. The markets too have an estimate. This
is reflected in the one-month futures in the currency markets,
all of which were trading above 60 at the time of writing.
If the RBI too is comfortable with that and focuses instead on
the volatility in the markets, then it is unlikely to do too much.
Selling dollars to cut down intra-day swing is what it would
aim at.
Does it have the reserves to do so? At $280
billion, the bank is running a cover of less than
seven months for imports, so the maximum
it could deploy at any stage is less than $30
billion. Among BRIC countries, this is the
smallest. Brazil and Russia, for instance, have
19 months’ cover (BofA estimates).
A week earlier, again a Monday, it cut room for banks to carry
out proprietary trading in the currency futures, exchange-
traded currency or options markets. This means it has crimped
the size of the rupee derivatives market temporarily.
The options now include:
a) More of the same, ie, raising rates further and/or
squeezing market volumes
b) Making it mandatory for exporters and those raising
foreign debt to bring their foreign currencies back home
c) Egging on banks to offer higher interest rates on non-
resident foreign exchange denominated accounts
d) Raising of forex borrowing on government or public sector
bank accounts
To take a call on any or all of these, the RBI will obviously
be guided by an underlying estimate of where the rupee is
The options for the Reserve Bank of India (RBI) and the finance ministry have
dropped off considerably since June 19 when US Fed chief Ben Bernanke signalled
that the quantitative easing policy could begin to ease off. The RBI on July 15 moved
two key interest rates — the marginal standing facility and the bank rate to 300 basis
points above the repo rates to make the rupee costlier to punt on.
Subhomoy Bhattacharjee, deputy editor, The Indian Express

3. 3
To cut down short-term volatility, however, that would suffice.
This allied with options a) and b) would be the RBI’s arsenal.
Options c) and especially d) could, however, become
necessary if the fiscal conditions – namely the balance of
payments – worsen. India ran a current account deficit of 4.8%
in FY13 and estimates for FY14 are 4.3% to 4.5 %. This means
an uncovered liability of $83 billion to fill up through portfolio
and direct investment, besides remittances. Worries on India
not pushing growth enough to earn the money to finance this
gap has piled on top of money seeping out from emerging
market economies to pull the rupee down.
Raising interest rates is expected to make debt flows stronger
as the differential with rates obtaining in developed markets
widens. But the higher rates could make equity flows weaker.
Lower interest rates mostly signal an economy with better
growth possibilities and, so, robust equity markets.
The options for sovereign bond are unlikely to be used
immediately as it will be rated and this will set a ceiling for
sub-national entities. A public sector bank-led effort to mop
upsomefundsfromabroadisthemorelikelyalternative,ifatall.
Trends in Indian monetary management
The current tensions in the rupee market have emerged
principally from the rising share of foreign trade in India’s
GDP. It is more than 40% of the GDP of $1.8 trillion.
The Indian banking system has been slow to adapt to the
requirement of this market, principally the need to hedge
currency bets. The RBI has run a generally closed market
that focused only on providing trade credits and discounting
of bills of exchange. It had not factored in the need for a
currency hedge.
So, in 2000, the onshore currency market with only the
USD-INR and Euro-INR pair available did business of just
$2.7 billion. As trade diversified, importers and exporters
consequently moved abroad to find ways to cover their risks.
The non-deliverable forwards (NDF) market in the rupee
sprang up where the underlying was the quote for the rupee
in the NSE, but the trades were squared off in US dollars. The
market developed in Singapore and then Dubai too joined
the party.
Also, in 2007, the government imposed a securities
transaction tax on the local market that pushed volumes
abroad by the shovel-load. By the time the domestic banks
moved in to take positions in the currency, the action had
shifted abroad. In June 2013, for instance, the total size of
the daily onshore currency market was about $40 billion.
But Singapore itself does business of close to $25 billion
in the rupee NDF market.
The 24-hour currency trading cycle is putting pressure on
managing the rupee by the RBI. Interference in the exchange
rates runs the risk of importing inflation and worsening the
fiscal deficit.
The RBI has in the past tried options, including setting up
quasi-sovereign banking bases abroad, to guide movements
in NDF but those have not delivered.
This brings us back to the connection between the rupee and
the behaviour of the economy.
There are two lines of argument for the RBI to grapple with.
A fall in the value of the rupee, some are convinced, will help.
A weaker rupee will help services sectors like IT. An early
indication of this was Infosys’ results. It released earnings in
line with forecasts, the first time after several quarters, buoyed
by a 9% dip in the rupee since June 2013. All such firms earn
in forex and pay in rupees.
In the manufacturing sector, too, the rupee can help. A
cheaper currency means Indian goods will be cheaper abroad.
This is significant as India has faced competition from China
in this sector due to the labour cost advantage that the latter
enjoys. A sustained dip in the rupee of this magnitude can
be a game-changer for Indian factories. If entrepreneurs are
convinced that the rupee will stay thereabouts with the cost
advantage vis-a-vis other Asian economies, it can change the
face of Indian manufacturing and create jobs. But the key here
is to ensure that capital-labour productivity should not dip off.
For the government, this helps instead of offering costly tax
set-offs to myriad sectors. Budget FY14 projects total direct
tax revenue foregone on this head as Rs 1,13,471 crore or
about 9% of total tax receipts.
But on the way there are short-term pains. The elections are
getting closer and these pains can be expensive.

4. 4
Fall season for the rupee
The global economic headwinds and India’s slowing growth have buffeted the rupee. What
are its prospects as we get into a difficult second half of the year?
Source: Bloomberg; all dates in FY 2013
Weekly closings
April 2
54.2688
April 9
54.585
April 16
54.145
April 23
54.385
April 30
53.8088
May 8
54.165
May 14
54.8162
May 21
55.415
May 28
55.965
June 4
56.4525
June 11
58.395
June 18
58.7725
June 25
59.675
July 1
59.5225
July 8
60.615
July 15
59.895
All-time low: 61.21, intra-day on July 8
Causes
» A surge in gold imports, leading to loss of precious foreign
currency, has created pressure on the rupee. There was
a sudden spurt in gold imports to 150 tons per month in
the first two months of this fiscal from 75 tons per month
in the previous fiscal. For 2012-13, India’s gold import bill
was $55 billion.
» Fear of US Federal Reserve tapering its quantitative easing
hit all asset classes. Currencies of all emerging markets –
Indonesia, Thailand, Brazil, India – have depreciated.
» Reserve Bank of India reluctant to intervene initially.
Impact
» Reduction in foreign institutional investor inflows as the
rupee’s slide has squeezed their margins.
» India is a net commodity importer; a weaker rupee will
widen the current account deficit.
» Fuel price will rise, raising prices of essentials in turn.
A weak rupee will increase the burden of oil marketing
companies, which will be passed on to consumers.
» Those studying abroad will have to shell out more.
Expenses, including fees, will shoot up.
» Foreign travel plans will be hit. Tickets and hotels will get
costlier, so will shopping and sightseeing.
What RBI is doing
» Hiking lending rates for banks and sucking Rs 12,000 crore
out of the system to reduce room for speculation on the
rupee.
» Marginal Standing Facility rate, which allows banks to
borrow money from the central bank at a higher rate in
times of a liquidity crunch, was raised to 10.25% from
8.25%.
June
FII outflows
(in Rs crore)
Source – SEBI (Includes equity & debt) * Till July 17, 2013
44,161.8 15,833.9
July*
I believe, due to
misinterpretation of [US
Federal Reserve Chairman]
Ben Bernanke’s statement
and some other factors, all
countries with current account
deficits have taken a hit on their
currencies. But that does not
mean the rupee will continue
to depreciate. The rupee will
find its level. We are concerned
about the volatility.
- P Chidambaram, finance minister

5. 5
Kandula Subramaniam, Associate Editor, Outlook Business
Dark times for the power sector
Investments have come in because the country is starved
for electricity and faces huge shortages of it. Most of these
investments have been made by either state generation
utilities or Central-Government-owned ones. State utilities do
not have a payment risk as they have an assured offtake but,
more importantly, they are owned by the state government
itself. In other words, the generation utilities get adequate
payments to keep afloat. Central utilities, on the other hand,
have firm power purchase orders with several states and their
payment risk is divided among these states.
It needs to be mentioned that a loss-making entity doesn’t
mean that it doesn’t have a stream of revenues. It is just that its
It is a sort of a paradox. On the one hand, the Indian power sector is adding generation
capacity. On the other hand, the sector’s financial losses keep increasing. At a time
when the country’s total power capacity crossed the 100,000 MW mark, the financial
losses of the sector at the state utility level were close to Rs 2 lakh crore.
revenues and costs don’t match. Buying electricity from other
sources like central utilities adds to the costs of a loss-making
state utility. The state utility ensures that payments are made
to the central utility from its existing revenue stream. In other
words, part of the revenues meeting one form of costs can be
diverted to meet the additional payment expenses arising out
of buying electricity from the central utility.
This is how generation utilities are surviving and investments
are being made in the form of capacity addition. And this is
why financial losses are mounting as the revenues of state
utilities are not increasing. But this capacity addition is far
behind actual demand.
Here’s a fact that many are not familiar with. Right up to the
mid-1980s, the Indian power sector was seen as a social
service. Even under the law, state utilities were not required
to make profits. In fact, the ruling legislation required state
utilities to meet their costs “as far as possible”. In the Indian
power sector, it is the state utilities that directly deal with the
retail consumer. Since they were not required to even break
even, electricity lines were drawn out with different objectives.
One of the prime objectives in the ’60s and the ’70s was to
ensure that villages had access to electricity in order to irrigate
land. As an indirect fallout of the green revolution, low-tension
electricity lines were drawn to villages so that they could
pump water and irrigate land.
While this objective was noble and had social relevance, what
really happened on the ground was a disaster that is yet to
be rectified. There was no account of how much electricity
was being used for the farm sector as it was not metered.
Electricity meant for agriculture was being stolen to run small
industries. The malaise of power theft spread from rural areas
to smaller towns and cities.
At the state utility end, what happened was unprecedented.
As there was lot of accounted-for power being sold, this either
got reflected in sale to agriculture or on to another category
called loss on account transmission and distribution (T&D).
Now, any electrical engineer would tell you that there is some
technical loss that happens when electricity is transmitted
through wires. This can be in the region of 3%-9% of electricity
distributed, depending upon the quality of wires. However,
states reported in the region of 40% to 70%. In other words,
around only 30% to 40% of the electricity was being billed!
No matter how many interventions were made, this legacy
continues, even though the number on T&D losses may be
slightly on the lower side now.

6. 6
That is why losses mount. You can’t increase rates and not get
compensated for providing subsidised electricity.
And if you want to increase rates, which segment bears
the brunt? It can’t be the rural sector, neither can it be the
industrial sector as a rate hike for it would raise input costs and
render their products uncompetitive. So the dagger has to fall
on the hapless domestic consumer. But is this also politically
feasible with some form of elections in states always around
the corner? Which government can justify high power rates
but no electricity?
What is important to understand is that the subject of
electricity has become very political. It is very difficult to
charge people for what they consume when they are used to
freebies. With rural areas being a popular vote bank, no
political party can take the risk of unpopular decisions. An
‘unpopular’ decision taken by one party is promised to be
reversed by the opposition party. That is how the Congress
returned to power in Andhra Pradesh in 2004, by promising
free power to the agriculture sector.
The problem is not in subsidising some deserving sectors.
The real problem is that the subsidy promised to the state
utility – that offers power at concessional rates to certain
segments of society as a political compulsion – is never paid.

7. 7
Policy Updates
New cyber security policy released
Union Communications and IT Minister Kapil Sibal recently
released the National Cyber Security policy. The policy aims
to facilitate a secure computing environment and enable
adequate trust in electronic transactions. The policy document
also outlines a roadmap for a comprehensive, collaborative
and collective response to deal with the issue of cyber
security.
New coal regulator approved
The Union Cabinet has approved the setting up of an
independent regulator for the coal sector and also approved
the introduction of the Coal Regulatory Authority Bill,
2013, in Parliament. The regulatory body will help in the
conservation of coal resources and manage the concerns of
all stakeholders –coal companies, coal-consuming industries
(power, steel, cement) and coal-bearing states, as well as
people associated with the industry.
Crackdown on ponzi schemes
With amendments in securities laws promulgated, the
Securities and Exchange Board of India (SEBI) would have the
power to regulate any pooling of funds under an investment
contract involving a corpus of Rs 100 crore or more, attach
assets in case of non-compliance and the SEBI chairman
would have the power to authorise search-and-seizure
operations as part of the crackdown on ponzi schemes.
Tighter sports regulations drawn up
A revised draft National Sports Development Bill 2013 was
prepared by the Ministry of Youth Affairs and Sports and
presented to the minister of state (independent charge)
on July 10. Among other things, responsibilities have been
imposed on the National Olympic Committee that include
adhering to the Olympic Charter, bidding for international
multi-sport events, setting up of a mechanism to address
grievances, conduct National Games at regular intervals,
constitute the Athletes Commission and function as a public
authority under the Right To Information Act.
New VAS guidelines in place
The Telecom Regulatory Authority of India has issued
directions to service providers on procedures for providing
value-added services and their deactivation in order to protect
consumers’ interests. The regulator, in a partial modification
of directions, asked service providers to implement a uniform
procedure for taking explicit consent of the consumer for
activation and deactivation.
‘Implement APMC laws in all states’
The Committee of State Ministers In-Charge of Agriculture
Marketing to Promote Marketing Reforms has called for
an effective implementation of the Model APMC Act in all
states. The committee submitted its final report to Agriculture
Minister Sharad Pawar. It recommended multiple and
competitive marketing channels, an independent regulator to
encourage private investors, the need for viability gap funding
to attract private investment, higher investment in marketing
infrastructure, waiver of market fees on fruits and vegetables,
an independent district-level authority for registration and
dispute settlement, and grading units with trained manpower.
More students for higher education
India will substantially increase the number of students in
higher education over the next seven years. A presentation
made by the HRD Ministry to the Consultative Committee
indicated that the Rashtriya Uchchatar Shiksha Abhiyan will
increase the gross enrollment ratio from 18% to 30%. The
scheme, estimated to cost Rs 99,000 crore, will include
other existing schemes in the sector. The highlight will be
that Central funding to institutions will be through the State
Council of Higher Education. Moreover, funding by the
Centre will be up to 90% and will be available to even private
institutions.
Health pact signed with UK institute
The Department of Health Research, Ministry of Health and
Family Welfare, and the Central Government have signed a
memorandum of understanding with the National Institute
for Health and Care Excellence, UK, to provide the framework
for strategic and technical cooperation between the two
countries. The agreement aims to (1) bring modern health
technology to people by encouraging innovation related to
diagnostics, treatment methods and prevention; (2) translate
the innovations into products/processes by facilitating
evaluation in synergy with government departments; and 3)
introduce these innovations into the public health service
through health systems research.
Export benefits announced
The report of the committee and suggestions received
from the Chambers of Commerce and Industry and Export
Promotion Councils have been analysed by the Department
of Commerce and it has been decided to include 150 products
in the Focus Product Scheme for an incentive at the rate of
2% of the Free on Board value of exports. Items from the
engineering, electronics, chemical and pharma sectors have
been included in the list. The benefit will be applicable for
exports made from August 1, 2013.

8. 8
National Food Security Ordinance:
All that glitters is not gold
Aim: Introduced as an ordinance recently, the National Food
Security Bill aims to provide food security to the millions that
live below the poverty line.
Annual cost: Rs 1.3 lakh crore
Mechanism: 62 million tons of rice, wheat and coarse cereals
will be supplied through the Targeted Public Distribution
System (TPDS). The Bill aims to enable access to 5 kg of
subsidised foodgrain per person per month. The grain would
be available to two-thirds of the people at Rs 3 per kg for rice,
Rs 2 per kg for wheat and Re 1 per kg for coarse grain through
ration shops.
Does it reach everybody?
The Bill’s intentions are noble, and it tries to connect the dots
from warehouse to the hungry, but many feel it is merely a
gimmick to earn votes during the 2014 general elections.
Food rights activists say the Bill leaves out lakhs of Indians
who have neither ration cards nor voter IDs.
What is the subsidy burden?
Finance Minister P Chidambaram had in his Budget speech
provided Rs 90,000 crore as food subsidy, which includes
Rs 10,000 crore for implementation of the National Food
Security Act. Government estimates predict that the additional
annual food subsidy burden would be Rs 23,800 crore.
Industry association FICCI said that implementing the Bill
might inflate the fiscal deficit.
What are the other criticisms?
» The Bill has been opposed by farmers’ bodies, which claim
it would lead to nationalisation of agriculture by making
the government the biggest buyer, hoarder and seller of
foodgrain. Moreover, it might distort incentives for farmers
to produce anything other than rice and wheat.
» Many are unhappy that the government has chosen the
archaic TPDS to distribute the grain. The TPDS is in a
mess, plagued with inefficiencies. Pilferage, the rotting of
grain and logistics inefficiencies mean many families living
below the poverty line never get to see the foodgrain they
are entitled to. The TPDS has virtually collapsed in several
states due to weak governance and lack of accountaBillity.
» It is expensive. Some feel that cash transfers would have
served the purpose at lower cost.
» One solution could be a state-level reform of the
TPDS, with each state choosing a model best suited to
it. Chhattisgarh, for instance, introduced its own Food
Security Act 2012 that is not limited to cereals, but
includes salt, black gram and other pulses. The state
handed over control of ration shops to women self-help
groups, panchayats and cooperatives. This corruption-free
back-end ensured effective monitoring of goods from
warehouse to shop, reducing leakages from the earlier
40% to 4% at present.
» The Central Bill does not address the fundamental
problem of malnutrition. There are 61 million chronically
undernourished children in India, and 8 million suffer from
severe acute malnutrition. The Bill does not focus on the
right to proper nutrition.
» The Bill by itself cannot solve all of India’s food-related
problems. Other measures, such as penalties for violators,
are needed too.

9. 9
Number View
$12 billion
What ArcelorMittal was going to invest in its steel plant
in Odisha. It scrapped the project after inordinate delays,
problems in acquiring land and securing iron ore linkages.
A day earlier, South Korea’s Posco decided to pull out of its
$5.3 billion steel mill project in Karnataka, primarily due to
delays in receiving iron ore mining rights and opposition from
residents, which held back land acquisition. However, Posco
will continue with its $12 billion steel mill project in Odisha.
100%
The new foreign direct investment limit in telecom (basic and
cellular services), up from the earlier 74%. Up to 49% remains
under the automatic route and 49%-100%through the Foreign
Investment Promotion Board route.
$8.40/unit
The new natural gas price set by the Union Cabinet, applicable
from April 2014, based on the Rangarajan Committee’s
formula. The new price reflects the scarcity value and is in
keeping with the ground reality of dearer gas prices, which
have a marked regional bias.
22.9%
Increase in visa on arrivals (VoAs) in June 2013 from June
2012. In June 2013, 1,062 VoAs were issued as compared to
864 in June 2012. This scheme was launched in January 2010
to attract more tourists from Finland, Japan, Luxembourg,
New Zealand and Singapore. The scheme was extended
to citizens of six more countries – Cambodia, Indonesia,
Vietnam, the Philippines, Laos and Myanmar – in January
2011.
Rs 1,030 crore
Approved outlay of the Modified Industrial Infrastructure
Upgradation Scheme for the 12th Five Year Plan period.
Approved by the Cabinet Committee on Economic Affairs,
the outlay sets aside Rs 450 crore for committed liability and
the remaining Rs 580 crore for 14 to16 new projects. These
include a minimum of two in the North-East for infrastructure
upgrades in existing or greenfield industrial clusters.
Rs 59,000 crore
Annual plan size for 2013-14 for Gujarat, which was finalised
between Deputy Chairman of the Planning Commission
Montek Singh Ahluwalia and Chief Minister Narendra Modi.
The plan includes central assistance of Rs 3,979 crore. In
addition, Rs 6,000 crore is likely to flow to Gujarat through
centrally-sponsored schemes. Thus, overall plan funding from
the Centre to Gujarat is expected to be Rs 10,000 crore during
2013-14.
$60 million
Size of loan for which the Centre has signed an agreement
with the Asian Development Bank. The money will be
used to improve urban services and strengthening project
management in several towns in North Karnataka. The
agreement is for the third project under the overall facility
of $270 million for the North Karnataka Urban Sector
Investment Programme.
The loan will be used to develop sewerage networks in six
towns, and help the rehabilitation and expansion of potable
water systems in two others. More than 100,000 households
will benefit.
Rs 710 crore
Sanctions granted under the Pradhan Mantri Gram Sadak
Yojana (PMGSY) at 2013-14 prices to Jammu and Kashmir as
a one-time dispensation to cover the cost of land acquisition
for compensatory afforestation, forest land, trees, private land
and structures for completion of PMGSY programmes. This
will expedite completion of these projects.
$255 million
Loan for which an agreement has been signed between India
and the World Bank for the National AIDS Control Project IV.
The project aims to increase safe behaviour among high-risk
groups and contribute to the national goal of reversal of the
HIV epidemic by 2017.
Rs 1,646.9 crore
Combined value of 16 proposals approved by the Centre on
the recommendation of the Foreign Investment Promotion
Board in its meeting held on May 10, 2013.

10. 10
Public Affairs Round-up
MSLGROUP INDIA
For more information on
what MSLGROUP INDIA PAR has
to offer to your company,
please contact our Asia Practice Leader
Jaideep Shergill
jaideep.shergill@mslgroup.com