11th Feb 2013

Why Europe is getting less bad in 2013By RUCHIR SHARMA

Investors spend their professional lives bouncing between the walls of fear and greed, but what Europe has experienced over the last few months is truly exceptional. The year began with 'Europhoria' gripping the financial markets, buoyed by relief that euro had survived. For much of 2012, the betting markets assigned more than a 50 per cent probability to at least one country ditching the euro by the end of 2013, but by early January this year, only a small minority harboured that fear.

A few weeks later, fear is creeping back as political uncertainty returns in Italy and Spain — major economies that had taken important reform steps last year and seemed to be on the mend. Italy goes to the polls later this month and a hung parliament seems increasingly likely to halt further progress. In Spain, Prime Minister Mariano Rajoy is under pressure to resign following reports that he received illegal payments from a party slush fund. Adding to Europe's woes is the prospect of the Netherlands entering the eurozone hospital, with painful symptoms of excess debt in its banking system and a bust in its housing market.

But this kind of relapse is normal in a crisis-ridden region, and it is obscuring the bigger picture in Europe. The long view suggests that things are getting less bad. Economic surveys show a steady improvement in business conditions and it is likely that the stalled eurozone economy will grow again by the second quarter. Even traditionally inefficient southern economies are starting to liberalise rules that restrain competition in their labour, product and service markets, which will help raise Europe's growth potential. It remains highly improbable that any member state will leave the eurozone.

All of this is bringing some money back to Europe, including the crisishit nations of the periphery: Portugal, Ireland, Italy, Greece and Spain. In the last four months of 2012, investors poured more than $125 billion into the peripheral nations, reversing an outflow nearly four times that size in the first three months of 2012.

Watching the drama in Europe, I can't help but recall the drama that unfolded in Asia back in 1997 and 1998, when fear of insolvency seized Bangkok and spread to Jakarta, Seoul and Kuala Lumpur, chasing off investors and triggering fiery protests. The Thai stock market tumbled to a total value of $30 billion, or less than Chrysler. By last year, a similar cycle of fear and flight had seized Europe, dropping the Greek stock market to a total value of $41 billion, or less than Costco, the American warehouse discount store. The same arithmetic could have been applied across 'peripheral Europe'; in Italy and Spain, for a time, the stock markets were worth less than Apple.

The lesson of Asia was not that troubled Europe was hopeless and doomed to collapse — quite the opposite. At the bottom in Asia, the affected markets — Indonesia, Thailand, Malaysia and South Korea — were worth $250 billion, or less than General Electric. Since then, east Asian markets have surged 10-fold in dollar terms, marking 1998 as a rare buying opportunity.

'Hopelessly inadequate' error detection responsible for last year's big data bloopers

NEW DELHI: While P Chidambaram has questioned the CSO's growth projection of 5 per cent for the Indian economy 2012-13, an official inquiry into India's notoriously unreliable economic indicators like the index of industrial production (IIP) and foreign trade figures has blamed 'hopelessly inadequate' error detection systems and multiple counting of exports for last year's big data bloopers.

In 2011-12, the government corrected its export numbers by $8.8 billion for April-October 2011. This was followed by a significant correction in the IIP growth for January 2012, which was revised from 6.8 per cent to 1.1 per cent due to a major revision in sugar output numbers.

Following the inquiry, the government has corrected the lacunae in its trade data calculations and appointed a high-powered committee under Planning Commission member Saumitra Choudhary to recommend a holistic overhaul of the IIP data series.

The panel is expected to submit its report this month and is likely to propose assigning seasonal weightages to IIP and foreign trade trends constitute two key inputs for the economic growth forecasts conjured up by India's statistical machinery, which are now being countered by the finance ministry.

Revenue and expenditure data from the Controller General of Accounts and advance estimates of agricultural output are the other two factors considered by the statistical office for its estimates.

Alarmed by the wide corrections in the data, the Parliamentary standing committee on finance had asked the government to conduct an inquiry into the reasons behind the errors. Last May, the National Statistical Commission (NSC) had roped in former RBI executive director RB Barman to conduct a one-man inquiry.

Barman blamed the glaring error in the IIP of January 2012 on the system's failure to detect 'impossible' sugar output numbers submitted for the index. For exports data, it found that the numbers went out of whack due to multiple counting of transactions.

'Wrong reporting of sugar production for January 2012 of 134.08 lakh tonnes, which was corrected to 58.09 lakh tonnes at the time of the first revision' led to the IIP correction,' Barman noted in his report.

"To correct such errors in seasonal products like sugar and tea that have a significant weightage in the IIP, we are considering assigning them seasonal weightages. This will also help us deal with anomalies created when a tea company reports uniform monthly output though the tea estate doesn't produce the beverage every month," said a senior government statistician aware of the deliberations of the Choudhary committee

Finance Ministry in talks with RBI for allowing PSUs to issue rupee bonds

NEW DELHI/MUMBAI: The finance ministry is holding discussions with Reserve Bank of India on a potential sovereign bond issue, in a major review of its policy on direct overseas borrowing.

The ministry is also simultaneously examining the possibility of state-owned entities, which have the backing of the sovereign, raising funds through rupee-denominated debt overseas, two government officials familiar with the development told ET. These rupee-denominated bonds would be tradeable on overseas exchanges.

"We are looking at pros and cons of both sovereign and a quasi sovereign bond issue. All options are on the table," said a finance ministry official. The ministry will hold discussions with some key stakeholders, including a number of PSUs who might issue rupee-denominated bonds, on Monday.

A rupee-denominated issuance will allow an enterprise to raise funds in dollars but without the exchange rate risk as the payment will be linked to the rupee. Investors will have to bear the exchange rate risk even though the inflow and outflow will be in dollars. In contrast, a dollar-denominated issuance exposes the borrower to exchange rate fluctuations.

Allowing rupee-denominated bonds will internationalise the Indian currency, but will also increase its exposure to international fluctuations, a concern highlighted by RBI during discussions on the proposal. The idea of allowing issuances of rupee-denominated bonds to overseas investors was first mooted by a high-powered expert committee on making Mumbai an international finance centre, which released a report in 2007.

On the issue of sovereign bonds, two people familiar with discussions said that the finance ministry recently wrote to the central bank formally seeking its views on a possible sovereign bond flotation.

The trigger for this could well be the record current account deficit - the excess of imports of goods and services - and transfers to outsiders over export of goods and services and remittances, now at 5.4 per cent of the gross domestic product or GDP.

While India has been able to finance this deficit thanks to robust foreign flows, any external shocks could worsen this and put further pressure on the local currency. A sovereign bond can help rebuild reserves which at last count was close to $300 billion, support the rupee-one of the weakest currencies in Asia- and more importantly lead to lower claims for funds from institutions in local bond markets.

Inflation is 'still high': RBI chief D Subbarao

MUMBAI: India's headline inflation at 7.5 per cent is "still high", the central bank chief Duvvuri Subbarao said on Monday.

Subbarao, speaking at an academic institution, said inflation was due to a spike in crude oil prices and the government's high fiscal deficit.

The Reserve Bank of India cut rates in late January, but refrained from spelling out further rate cuts due to concerns about the country's current account deficit and inflation flaring again in the later half of 2013.

US to lead global recovery, bullish on India, says Mukesh AmbaniMukesh Ambani expects US to lead a recovery in global economy this year and is bullish about the Indian growth story despite the recent glitches.Reliance Industries Ltd.BSE

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MUMBAI: Billionaire Mukesh Ambani expects the United States to lead a recovery in the global economy this year and is bullish about the Indian growth story despite the recent glitches. "I am more optimistic than most and my view is that this year we will see the beginning of the recovery, particularly in the US," Ambani said in an interview to a private television.

He said US initiatives in energy would help the entire world. "For many decades we have heard that the US will be independent of the foreign imports of energy. Realistically, it is my judgement this will happen in the next five-seven years. The US has truly found non-conventional energy in shale oil and gas, which will really bring in benefits not only for the people in the US but for (everyone) across the world," Ambani said.

Reliance itself has invested $5.2 billion in the shale business in the US and has set up joint ventures with Chevron, Pioneer Natural Resources and Carrizo Oil & Gas and a midstream joint venture with Pioneer. RILBSE 0.50 %, which operates the world's largest refining complex at Jamnagar, plans to invest 1 lakh crore in the next five years in energy and retail businesses to double its operating profit. The company has diversified into solar power business and expects solar power to become price competitive as compared with power generated from fossil fuel.

"We will transit from what I call a hydrocarbon present, which is coal, oil and natural gas, over the next many decades into a fully renewable sustainable future and solar really would be at the heart of it," Ambani said.

Ambani said he was bullish about India despite slowing growth and muted investment by foreign investors due to infrastructure constraints and policy-related problems.

"India is a bottom-up story and not a top-down story. So we will adjust with what happens in the rest of the world, but we are on a long-term growth trajectory. And this is not growth only in terms of GDP numbers. This really is for the well-being of each and every Indian and that is the aspiration," Ambani said.

India's economic growth rate is feared to decline to a 10-year low of 5 per cent in the current fiscal to March, dragged by poor performance of manufacturing, agriculture and services sector. "My father started Reliance with $100. When I joined in 1980, the market value of Reliance was $30-40 million and in 30 years the opportunities that were provided by this country have enabled us to create wealth for India," Ambani said.

Oil price, inflation, IIP nos to guide market this week

MUMBAI: Stock markets will closely track crude oil movement — which has hit a nine-month high and could further worsen the trade deficit — besides wholesale inflation numbers for January and factory output data for December for cues this week.

"Markets are likely to remain volatile this week. We expect Nifty to trade within a range of 150 to 200 points," said Rajesh Jain, executive vice-president at Religare Securities. "Nifty has strong support at 5850 on the downside and strong resistance at 6050 on the upside." Sensex and Nifty ended down 1.5% each last week. While Sensex closed the week at 19484.77, Nifty ended at 5903.50.

Traders said stock markets could take comfort from P Chidambaram's statement on Saturday that India was likely to post a GDP growth of 5.5% in the current fiscal year, more than the 5% estimate of the Central Statistical Office, as the economy started showing signs of revival since November.

Analysts say once the results season concludes on February 14, investors' focus will shift to expectations from Union Budget to be presented to Parliament on February 28.

Brent crude prices last week flared to $119 a barrel on strong demand from China and lower supplies from the Organization of the Petroleum Exporting Countries. This is bad news for India, which imports almost 80% of its crude. Rising energy prices not only inflates trade deficit, it also puts pressure on company margins apart from raising prices of almost everything — from fruits and vegetables to manufactured items. This, in turn, acts as a drag on household savings and investments in assets like shares.

"Brent crude prices are trading around $119/ barrel and this is a serious concern for Indian stock markets," said Sankaran Naren, chief investment officer, ICICI Prudential Mutual Fund. "We are concerned about current account and fiscal deficit numbers as these macro data have direct impact on market sentiment."

Analysts say stocks of government-owned refineries Indian OilBSE -0.48 %, Bharat PetroleumBSE -0.54 % and Hindustan PetroleumBSE -0.56 %, along with exploration companies Oil & Natural Gas and Oil India, may come under pressure on concerns over rising subsidy bill, currently estimated at .`1.24 lakh crore.

IIP is expected to rise 1.1% in December after shrinking 0.1% in November, showing signs that the fall in IIP has bottomed out, according to a Bloomberg estimate. The data is expected to be announced on Tuesday. Inflation numbers for January are expected on Thursday.

According to a Bloomberg estimate, WPI inflation is expected to ease to 6.9% from 7.1% in December. However, rising crude prices pose a risk going forward. "The inflation numbers for January are expected to moderate. However, with rising crude oil prices and monthly diesel price hike of .`0.50/ litre, it's going to be difficult to keep inflation around 7%," said Rikesh Parikh, vice-president, equities, at Motilal Oswal Securities.

"Earnings of some state companies may disappoint." On the global front, the G20 finance ministers and central bank governors will meet in Moscow for two days from February 14 to discuss the global economic situation

China becomes the world's biggest trading nation, beats US dominanceBEIJING: China surpassed the US to become the world's biggest trading nation last year as measured by the sum of exports and imports of goods, a milestone in the Asian nation's challenge to the US dominance in global commerce that emerged after the end of World War II. US exports and imports of goods last year totaled $3.82 trillion, the US Commerce Department said last week. China's customs administration reported last month that the country's total trade in goods in 2012 amounted to $3.87 trillion.

China's increasing influence threatens to disrupt regional trading blocs as it becomes the most important commercial partner for countries including Germany, which will export twice as much to China by the end of the decade as it does to neighboring France, said Goldman Sachs's Jim O'Neill. "For so many countries around the world, China is becoming rapidly the most important bilateral trade partner," O'Neill, chairman of Goldman Sachs's asset management division and the economist who bound Brazil to Russia, India and China to form the BRIC investing strategy, said in a telephone interview.

"At this kind of pace by the end of the decade many European countries will be doing more individual trade with China than with bilateral partners in Europe."

When taking into account services, US total trade amounted to $4.93 trillion in 2012, according to the US Bureau of Economic Analysis. The US recorded a surplus in services of $195.3 billion last year and a goods deficit of more than $700 billion, according to BEA figures. China's 2012 trade surplus, measured in goods, totaled $231.1 billion. The US economy is also double the size of China's, according to the World Bank.

In 2011, the US gross domestic product reached $15 trillion while China's totaled $7.3 trillion. China's National Bureau of Statistics reported January 18 that the country's nominal gross domestic product in 2012 totaled 51.93 trillion yuan ($8.3 trillion)

Global markets: Equities, oil steady; euro dips in thin trade

SINGAPORE: Oil and equities dawdled on Monday near multi-month highs scaled after robust Chinese trade data last week, while the euro slipped to a two-week low as uncertainty surrounded a political scandal in Spain and a looming election in Italy.

With the Lunar New Year holiday shutting most Asian financial centres, including those in Japan, China, Hong Kong, Singapore and South Korea, trading was light and volatile on many of those exchanges that remained open.

European markets were expected to likewise lack momentum in the absence of major economic drivers and ahead of a meeting of the Eurogroup, where the discussion around the risk of a global round of competitive currency devaluation could re-emerge.

Financial bookmakers called major European indexes to open flat. Australian shares were flat after closing at a 34-month high on Friday following positive data from China, the most important consumer of Australia's commodity exports.

S&P 500 index futures inched up 0.1 per cent after the Wall Street benchmark reached a five-year high on Friday.

Brent crude oil, which touched its highest in nine months on Friday, was unchanged just below $119 a barrel.

Foreign exchange trading was choppy in thin volumes, with what traders interpreted as slightly dovish comments from the European Central Bank last week also weighing on the euro, which has shed around 2.5 per cent since reaching a 15-month high above $1.37 on Feb. 1.

The euro briefly fell to $1.3325 on Monday, after stop-loss selling was triggered below $1.3340, traders said, before recovering to stand little changed around $1.3370.

There are growing worries about Spain as a scandal on secret cash payments engulfs the prime minister, while confidence in Italy has been shaken in the run-up to a Feb. 24-25 election. "The euro's upside is likely to be limited and short-lived," said Aroop Chatterjee, an analyst at Barclays Capital.

"Better financial conditions are likely to be offset by rising political risks, market positioning and a weaker economy. We expect the euro to be on a declining trend beginning in Q2."

The yen pared a little of its recent heavy losses after Japanese Finance Minister Taro Aso said it had weakened more than intended.

The currency, which has been an easy one-way bet for weeks as Prime Minister Shinzo Abe put intense pressure on the central bank to take bold action to revive Japan's fragile economy, also recovered from its recent 4-week trough against the Aussie, the latter changing hands at 95.25 yen AUDJPY=R, compared with a peak of 97.42 set on Tuesday.

January Inflation likely at more than 3-year low

BANGALORE: Indian inflation likely eased again inJanuary to its lowest level in over three years due to a smaller rise in prices for manufactured goods, according to a Reuters poll. 

Still, the headline rate will probably remain well above the Reserve Bank of India's perceived comfort zone of around 5 per cent for a while, giving the central bank little room to ease monetary policy aggressively. 

Wholesale prices rose 7.0 per cent in January from a year earlier, the lowest rate since November 2009, and a tad slower than December's three-year low of 7.18 per cent, according to a forecast of a Reuters poll of 31 economists taken over the past week. 

Forecasts for the index, due on Thursday around 0630 GMT, ranged from 6.24 per cent to 7.40 per cent. 

The RBI cut its key lending rate in January for the first time in nine months to support a slowing economy but said further easing would depend on both the gaping current account deficit and inflation moderating further. 

"On a seasonal basis, January is a month where we see manufacturing prices rise, and it usually happens because in the run up to the budget manufacturers often pass on prices to consumers in anticipation in changes to taxes," said Yuvika Oberoi, economist atYes BankBSE 0.96 %. 

"In this time of the economic cycle, given how demand in the economy is, the ability to pass through prices is very limited." 

Prices of manufactured goods, which has a 65 per cent weighting in the headline rate, led the slowdown in theinflation rate in December. 

The manufacturing Purchasing Managers' Index for January showed prices rose at a slower pace, suggesting the headline rate may have dipped last month. 

However, food prices, which along with fuel make up about a third of the wholesale price index, likely remained high as the severe winter in the northern food producing states of the country cramped supply. 

"There could be a little bit of a potential uptick in food inflation on the back of some of the weather related factors we have had more recently," said Leif Eskesen, HSBC's chief economist for India and Southeast Asia. 

The main concern is onion prices, the staple ingredient in Indian cuisine, which have more than doubled in the last three months as supplies remained tight. 

India's 1.2 billion inhabitants chomp their way through 15 million tonnes of onions a year, using them as the base for most traditional curries, and when prices rise it gives a significant kick to inflation. 

While food prices have kept headline inflation high, core inflation - non-food items and manufacturing - extended its downward trend and dropped to 4.2 per cent in December. 

The government, which fixes the retail price of diesel, last month told retailers to raise the price of the subsidised fuel in small amounts every month, a move aimed at propping up public finances. 

"We wont necessarily see much of the impact from the hike in diesel prices because it was relatively limited and also towards the middle of the month but there could be some slight uptick in energy related prices," Eskesen said. 

India is the world's fourth biggest oil importer.

Greece sees lower budget deficit in 2013, fiscal gap in 2016

ATHENS: Greece expects to cut its budget deficit to 4.3 per cent of GDP this year, lower than previously forecast following debt relief measures, but faces a smaller primary surplus in 2016 than agreed with its lenders, new budget projections show. 

The deficit target for this year, unveiled in an updated 2013-16 medium-term budget plan on Friday, is smaller than an estimate of 5.5 per cent of GDP in the previous mid-term plan drafted in October. 

The government updated its 2013-16 projections to include debt relief measures agreed with Greece's lenders in December and set binding spending limits, a key condition for the continued flow of bailout funding by its euro zone partners and the International Monetary Fund. 

In the latest plan, submitted to parliament for approval, Athens also projected a smaller primary budget surplus - which excludes debt payments - for 2016 at 3.2 per cent of GDP. That is lower than the 4.5 per cent of GDP target agreed with lenders, meaning a 2.5 billion euro gap that will need to be bridged. 

"The government believes ... that with the emphasis it will place on structural measures and growth initiatives, it will cover the small fiscal adjustment that might result in 2015-16," the plan said. 

The updated plan is based on unchanged growth assumptions, forecasting a 4.5 per cent GDP contraction this year and taking into account new tax measures passed by parliament last month. 

The plan assumes the economy will return to growth in 2014 after six years of recession, although it will only expand by 0.2 per cent next year. It expects growth to accelerate to 2.5 per cent in 2015 and 3.5 per cent in 2016.

Government will not borrow more this fiscal year: Arvind Mayaram

MUMBAI: The Finance Ministry today ruled out more market borrowings during the remaining period of the fiscal saying it will stick to 5.3 per cent fiscal deficittarget.

"We will not go into the market for additional borrowings this fiscal and will be able to keep the fiscal deficit at 5.3 per cent of GDP," Economic Affairs Secretary Arvind Mayaram said here this evening.

He was talking to reporters on the sidelines of an event to launch the Financial Technologies-promoted MCX-SX, which is the third major stock exchange.

The government has initially budgeted a marketingborrowing target of Rs 5,13,590 crore or 5.1 per cent fiscal deficit of GDP for this fiscal, which was later revised upwards to 5.3 per cent in October, increasing the market borrowing by another Rs 23,000 crore.

On the revenue side, with three divestments, the government has already met nearly 73 per cent (around Rs 21,700 crore out of Rs 30,000 crore) of its divestment target and is confident of meeting nearly 90 per cent with three more sell-offs in SAIL, Nalco and MMTC in the remaining days of the fiscal.

With the government in expenditure cutting mode, various ministries are bracing for reduction in their annual budgets for the year 2013-14 which could be even up to 24 per cent of this fiscal.

The CGA data revealed that during April-December 2012, the revenue receipts stood at Rs 5,70,536 crore or 61 per cent of the estimate. The performance on revenue mop up front during the period at 61 per cent of the estimate was lower than 63.1 per cent achieved during April-December 2011.

The government is eyeing Rs 935,685 crore revenue this fiscal. Tax collection (Rs 4,84,156 crore) slipped to 62.8 per cent of the Budget estimate compared to 63.3 per cent achieved in the same period last year.

Government receipts during the period totalled Rs 5,86,424 crore while the expenditure worked out at Rs 9,91,123 crore.

Finance Ministry says CSO underestimates GDP; growth likely to be 5.5%

NEW DELHI: Finance Ministry today said the CSO has underestimated GDP growth rate for current financial year and exuded the confidence that economic expansion will exceed 5.5 per cent. "It is likely that the advance estimates of 5 per cent will be revised and the final estimate will be closer to the government's estimate of a growth rate of 5.5 per cent or slightly more," the Finance Ministry said.

The Central Statistical Organisation (CSO) has "probably underestimated" the growth for the current fiscal and estimates are likely to be revised upwards in the final projections, the ministry said in a statement.

In advance estimates for 2012-13, the CSO has projected economic growth rate of 5 per cent, the lowest in the decade. In the previous fiscal GDP grew by 6.2 per cent.

The finance ministry said CSO's advanced estimates have often been revised either upwards or downwards because it takes into account the data till November or December.

"... This makes its estimates accurate when GDP growth is following a trend, but not when it is turning. So, for example, growth was overestimated as the economy slowed in 2008-09 and 2011-12, while it is probably underestimated now," the statement said.

The finance ministry had earlier projected a growth rate of 5.7-5.9 per cent, while the Reserve Bank in its latest review has pegged it at 5.5 per cent for the current fiscal.

Quoting various data, the ministry said that there are signs of recovery and upturn in the economy. It said the Purchasing Manager's Index (manufacturing) has started moving up since October 2012 and industrial output too has started stabilising.

The growth in excise duty and service tax collection was also high at 16 per cent and of 33 per cent respectively in April-December 2012. Moderation in inflation to 7.2 per cent also shows early signs of economic upturn.

CSO fails to see a major turnaround, pitches economic growth at 5 per cent

NEW DELHI: India's statistical office does not see green shoots of turnaround as purported by the finance ministry that virtually rejected former's advance estimate of GDP growth for the current fiscal pegged at decade's low of 5 per cent. 

The North Block has pitched for higher final growth of 5.5 per cent in the current year, banking on what it sees as indications of a turnaround such as a betterexcise duty collections and slightly improved purchase manager's index since November. 

"There is no growth visible in most of the sectors, be it construction or other services, so how do you expect us to assume a higher growth when the numbers till December indicate a further decline", said a CSO official involved in calculating the estimates. 

But, the finance ministry expects a revision in the numbers like in the past. 

"CSO bases its advance estimates on the data till November or December, depending on availability... this makes its estimates accurate when GDP growth is following a trend, but not when it is turning," it said. The government has taken measures to revive the investment sentiment and it also expects that a reduction in policy rates will also improve the climate. 

The CSO official, however, pointed to some of the dismal data for the third quarter that ended December 31 and it was unlikely that something unusual in Q4 will lift up the numbers substantially. He also hinted at some overestimation in the first half numbers that could see a downward revision. 

On Thursday, the day CSO released the unexpectedly low growth forecast, the finance ministry in a statement said that the estimate was based on data till November but since then leading indicators have turned up and hoped the final number will be better. 

The finance ministry second statement on Friday said advance estimates are frequently revised particularly when the economy was turning, and argued forecefually that final growth could be closer to 5.5 per cent. 

The CSO says growth was lowered because of the dismal trend in the steel and cement consumption. The construction sector is projected to growth 5.9 per cent for the fiscal, much lower than 8.8 per cent reported in the first half. The consumption of steel rose 8.8 per cent in Q1, but the growth moderated to 5.4 per cent in the first half and finally to 3.9 per cent till December. Cement consumption growth fell from 10.1 per cent in Q1 to 7.8 per cent in the first half and further down to 6.1 per cent by December. 

"On what basis do we estimate a higher growth", the official questioned

People suffering due to high inflation forces RBI governor D Subbarao to hold rates

MUMBAI: It is the silent millions of poor squeezed by soaring prices who were the driving force behind the Reserve Bank of India's decision to keep interest rates high, the central bank's governor said on Monday.

"People who are worried about economic growth are typically quite articulate, that they have a platform to express their concerns," said Governor Duvvuri Subbarao, using language strikingly different from the cut and dry style usually preferred by central bank chiefs.

"I have sympathy with that view (that high interest rates was hurting growth). I am not saying that's an invalid criticism. But I just want to say that their voice is heard, but people who are hurt by inflation - the large majority of the poor - their voice is not heard."

Corporates and even Finance Minister P Chidambaram, who in the past has said inflation is a tax on the poor, have expressed unhappiness at RBI's reluctance to lower interest rates. After a nine-month gap, Subbarao lowered key interest rates late last month by 25 basis points.

A basis point is 0.01 percentage point. Economists affiliated to prominent banks and brokerages have forecast interest rate cuts of 50-75 basis points by December 2013.

The governor said the decline in growth was because of the slump in consumption and the fall in exports. But it was the slump in investments that last week forced the Central Statistical Organisation to forecast a 5 per cent economic growth this fiscal, which was the most worrying as it was a portend of grim tidings for the economy. "It (the slump in investments) is a matter of great concern because today's investment is tomorrow's production capacity," said Subbarao, addressing students at the Indira Gandhi Institute of Development and Economic Research in Mumbai. "So if investment is not taking place today, our growth potential on our way forward is going to be hurt."

While the statistics office stands by its forecast citing poor investments, Chidambaram is forecasting 5.5 per cent growth believing there are green shoots in the economy.

Subbarao expressed concern over the rising current account deficit, the excess of spending overseas over exports of goods and services.

"We would not worry so much if it was on account of import of capital goods, but here we are having current account deficit on account of oil and gold," he said. "The way we are financing it. We are increasingly financing it through volatile flows. We should ideally be financing through foreign direct investment."

Current account deficit for the September quarter rose to a record 5.4 per cent of the gross domestic product and is forecast to be above 6 per cent for the December quarter.

In an interview to this newspaper in October last year, Chidambaram had said the finance ministry was, if necessary, prepared to "walk alone" if the RBI did not respond to reform measures by cutting interest rates.

The central bank has backed reform measures announced by the government since September last month, but have stuck to their guns when it comes to rates, as inflation has not declined noticeably.

Reserve Bank of India considers more gold import curbs

MUMBAI: Reserve Bank of India could limit gold imports by banks in "extreme circumstances," it said on Wednesday, as it put forward measures to help the world's biggest consumer of gold rein in purchases and battle a record-high current account deficit.

India, which imported about 750 tonnes of gold last year with 60 percent of that through banks, has already increased the import duty on gold, which now stands at 6 percent.

But a record high current account deficit of 5.4 percent of GDP in the September quarter has raised concern at the central bank, prompting it to link further monetary policy easing to a lower current account deficit (CAD).

"If the CAD remains sustainably high, say in 5.5-6 percent range, for the next three-four quarters, then it might be a case of an extreme situation," a senior official with direct knowledge of the matter told Reuters.

The Reserve Bank of India (RBI) said it would also consider introducing gold-linked financial instruments to divert savings of inflation-wary Indians from gold bars and coins into bonds, it said in a report published on Wednesday.

The recommendations now go to government for review and after its feedback, the RBI should announce new restrictions and products to curb gold import demand in the next few months.

The government has been warned of a credit downgrade by rating agencies due to high fiscal and current account deficits.

Duty rises helped to cut imports by 25 percent last year but analysts were sceptical these measures would have any serious impact on purchases in a country whose obsession with gold means households have more stored away than the U.S. Federal Reserve.

And the central bank itself, describing demand for gold as "excessive," added that it would only be reduced if inflation were benign and there was price and macroeconomic stability.

Headline inflation fell to a three-year low of 7.18 percent in December but still remains above the central bank's comfort level of around 5 percent.

"More restrictions from the government will result in more illegal imports ... unofficial imports have already started in Mumbai," said Kumar Jain, vice president, Mumbai Jewellers Association, which groups 12,000 jewellers.

Other measures could include a special "gold bank" which would buy gold from individuals at much higher rates than those offered by local jewellers in an attempt to move some of the 20,000 tonnes of gold stored by households into the economy.

"Even if these proposals are implemented, the impact on gold import will be limited till the point it is possible to unlock the idle gold stock," said Samiran Chakraborty, regional head of research Standard Chartered Bank, India.

"I think these rules could have a marginal impact on the current account deficit due to the shock-and-awe effect, but not a sustained impact," Chakraborty added.

SMALL STEPS The central bank itself admits these are only small steps and unlikely to bring down gold imports significantly in India.

"Demand for gold in India is autonomous and may not be amenable for reduction through policy intervention. Several studies have empirically validated that gold can be regarded as a long-run inflation hedge," the RBI said in its report.

Other measures proposed include removing incentives for banks to trade bulk gold with jewellers as banks have been charging them rates below the so-called base rate offered to their best customers, a move which could sharply bring down gold loans. Banks extend gold loans in the form of gold bars to traders at a fixed rate.

The central bank also wants to educate rural customers, who buy some 70 percent of imports, about investing in gold related products, but fell short of details. Some 70 percent of India's population lives in rural areas where access to banks is poor.

Retail inflation at 10.79%: Why food prices are not falling

NEW DELHI: Rising for the fourth consecutive month, retail inflation remained in double digits at 10.79 per cent in January, driven by higher prices of vegetables, edible oil, cereals and protein-based items.

The country's retail inflation is the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa.

Analysts do not see prices of food items coming down anytime soon and have blamed supply side constraints for a consistently high number. Nitesh Ranjan, Economist, Union Bank of India expressed disappointment at the high CPI number.

"We have seen that food inflation has remained high even in the WPI. I do not expect pressures from the food side to ease anytime soon, so expect the CPI to remain high for some more time," Ranjan said.

Dr Brinda Jagirdar, General Manager & Head Economic Research expects food inflation to remain sticky and blames supply side contraints for it being so high. "We expect food price inflation to remain sticky for a while mainly because there has not been a great pickup from the supply side. The per capital availability of cereals has been declining," Jagirdar told ET Now.

"India is the largest producer of fruits and vegetables. Yet, we are unable to meet the demand. We are also the largest producer of milk. We need to take measures on the food processing and distribution side. We need to tackle inflation so that consumption demand picks up," Jagirdar opined.

"Softening in inflation is on account of a decline in core inflation and from the manufacturing side. This is because global commodity prices are softening and pricing power has also been declining. Therefore, manufactures are not able to pass on any hike. We expect WPI to decline to around 6.8% to 7%," Jagirdar added.

The vegetables basket in January recorded the highest inflation of 26.11 per cent among all the constituents that make the Consumer Price Index (CPI), according to data released.

Vegetables were followed by the oil and fats segment at 14.98 per cent. Meat, fish and egg became 13.73 per cent more expensive during the month.

While, cereals and pulses became dearer by 14.90 per cent and 12.76 per cent respectively on an annual basis, sugar turned more expensive by 12.95 per cent.

Clothing and footwear witnessed 11 per cent increase in prices during the month.

In urban areas, retail inflation rose to 10.73 per cent in January from 10.42 per cent in the previous month. The CPI for rural population increased to 10.88 per cent during the month from 10.74 per cent in December.

The data for wholesale price index (WPI)-based inflation is expected on Thursday. The WPI figures for December stood at 7.24 per cent, much higher than RBI's comfort level of 5-6 per cent.

The Reserve Bank of India (RBI) in its monetary policy last month had slashed its key interest rates by 0.25 per cent and released Rs 18,000 crore additional liquidity into the system to perk up growth through reduced cost of borrowing.

The RBI has forecast the March end WPI inflation at 6.8 per cent.

Meanwhile, industrial output growth rate contracted by 0.6 per cent in December, 2012, compared to a growth of 2.7 per cent in same month a year ago.

Economy recovery hopes dashed as December IIP unexpectedly shrinks

NEW DELHI: December industrial production unexpectedly shrank for a second straight month in December, weighed down by weak investment and consumer demand, casting doubt on Finance Minister P Chidambaram's view that Asia's-third largest economy is showing signs of recovery.

The index of industrial production ( IIP) fell 0.6 per cent annually in December, data released by the Central Statistics Office showed on Tuesday.

A Reuters poll of 24 economists had expected growth of 1.1 per cent, after output shrank 0.8 per cent in November.

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 per cent to overall gross domestic product (GDP), fell 0.7 per cent in December from a year earlier.

"What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought," said Sujan Hajra, chief economist at brokerage firm Anand Rathi in Mumbai, who said he now sees GDP growth next year of 5-6 percent.

Preliminary data from statistics office last week predicted growth of 5 per cent for the fiscal year ending in March 2013.

That was worse than anticipated and triggered an angry response from Chidambaram.

Chidambaram said the Central Statistical Organisation had used "dated data" and argued that GDP growth was following an upward trend in a sign of revival. He reiterated his view that 5.5 per cent growth was possible.

"We can recapture the magic of 2004-08. The average growth was 8.5 per cent during that period," he said on Saturday.

"Why should we, without any reason, denigrate our own performance and record? I have no doubt in my mind that we will come out of the trough and we will climb back to a growth rate of between 6-7 per cent next year," he said.

Chidambaram is under political pressure to unveil a growth-oriented budget on Feb 28 for the next fiscal year, as the government gears up for an election due by early 2014 at the latest.

But he is also faced with the arduous task of trimming a swollen fiscal deficit that has put country's investment-grade credit rating in peril. He has already ordered spending cuts in welfare, defence and road projects for this financial year.

Critics warn that at a time of low growth, lower spending risks deepening the slowdown without helping the deficit-to-GDP ratio.

RATE CUTS MAY HELP

The Reserve Bank of India reduced its policy interest rates by a widely expected 25 basis points on Jan 29 to spur the economy, and investors hope slower price rises will lead to another.

"Despite incremental efforts we are still staring at a weak growth print," said Jyotinder Kaur, economist at HDFC BankBSE 0.82 %.

"We expect a rate cut in March as growth is consistently surprising on the downside while the pace of CPI (consumer price inflation) has stabilised."

Consumer price inflation inched up to 10.79 per cent in January from 10.56 per cent a month ago, according to other data on Tuesday.

January wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy, is due on Friday. The index for December rose 7.18 per cent, the slowest

At 7.2 % inflation is still high, says RBI Governor

MUMBAI: Ahead of the January inflation readings later this week, Reserve Bank Governor D Subbarao today said the price rise index which slowed to a three-year low of 7.18 per cent in December, is "still high."

"If you take the macroeconomic context today, you find that growth has moderated, inflation has come off the peak, but even at 7 plus per cent, it is still high," he said while addressing the convocation of the RBI-promoted Indira Gandhi Institute of Development Research here.

The forthcoming inflation numbers are important as they come after the January 29 policy easing, when the RBI cut both the interest rates as well as the cash reserve requirements of banks by 25 bps.

The also come after the government partially freed diesel prices in the middle of January by allowing oil companies to raise retail diesel by 40-50 paise every month apart from taking away the subsidy on bulk diesel customers.

While retail or consumer-price based inflation readings jumped to over 10 per cent in December, headline inflation declined to a three-year low to 7.18 per cent during the month.

The January inflation numbers are also crucial because they will be considered before the mid-quarter review by RBI on March 19.

Taking a dig at those who blame his tight monetary stance as a major reason for the steep decline in growth, the Governor said: "The RBI has been criticised for hurting growth and we are sensitive to that. But one should understand that the person blaming for growth is very articulate and has got proper platforms for speaking up."

"However, the person pinched by inflation does not have a platform and I think both the RBI and the government should take care of that part of the population," said Subbarao, who fought a solitary battle of nearly 40 months to fight inflation even as his counterparts across the globe have re-embraced an easy monetary policy regime as growth in their home countries faltered again.

On the still sticky inflation, Subbarao said: "Though it has declined from peak, it still is above our comfort level" and pointed out that "structural and cyclical factors are driving the inflation".

"Crude oil and food inflation are driving inflation up. There is inflation from the high fiscal deficit as well apart from those coming in from demand pressures. How do we balance between declining growth and stubborn inflation? How do we calibrate the balance? That's a constant struggle in the Reserve Bank," the Governor said

GDP forecast fuels Reserve Bank of India rate cut hopesGUWAHATI: Reserve Bank of India governor Duvvuri Subbarao on Thursday said the central bank will take the lower GDP growth projection into account while framing the next monetary policy, raising hopes of another 25 basis points (bps) cut at the least in March. The Central Statistical Organisation (CSO) has cut the GDP growth forecast to 5% for 2012-13 based on advanced estimates.

Last week, the RBI had lowered it to 5.5% from 5.8%. The economy grew 5.3% in the July to September quarter, the slowest in last three years. "There is a strong possibility of a 25 bps rate cut by RBI," State Bank of India's chief economist Brinda Jagirdar told ET, reacting to Subbarao's statement. "As the negative output gap has widened, any rise in growth will not impact inflation."

Shubhada M Rao, senior president and chief economist with YES BankBSE 0.67 %, expects another 50-75 bps cut in repo rate by December. "The lowered growth estimates may not necessarily frontload the rate cut, but a 25 bps cut may be in the reckoning and can happen as early as in March."

Governor Subbarao, who held the RBI's board meeting in Guwahati on Thursday, said: "I am unable to comment on rate cuts at this forum. As the meeting was in progress we got to know about the CSO projection. We will take that into account as and when we make our next policy."

The central bank reduced the benchmark rate and cash reserve ratio by 25 bps each on January 29 in its policy meeting, but the governor had cautioned the market about high current account deficit and sticky food price inflation.

"Our assessment of fiscal deficit and inflation was indicated in our policy review on January 29. We have taken note of the road map for fiscal consolidation

put out by the finance minister. And like everyone else in the country and around the world, we are also looking forward to the Budget to have a better understanding of how fiscal consolidation could be done on the way forward," Subbarao said.

Moody's says downside risks to global economy have abated

SYDNEY: Moody's Investor Services on Tuesday said downside risks for the global economy had receded in the past three months, though a number of dangers still remained. 

In its latest Global Macro Risk Scenarios report, the ratings agency also said it expected economic growth to be slow in many countries. 

"While our central forecasts are little changed, the downside risks have definitely abated over the past three months," said ColinBSE 1.22 % Ellis, Moody's Senior Vice President for Macro Financial Analysis. 

"However, we still expect a subdued global recovery with sub-trend growth in most advanced economies over the near term, alongside a relatively soft pace of expansion in emerging markets as well." 

The ratings agency expects real growth for the G20 of around 2.9 percent in 2013, followed by 3.3 percent in 2014. It forecast growth in the United States this year, but expected the euro area as a whole to stagnate during 2013.

The real stunt in India's growth story is the education deficit

The steady deterioration in India's economic growth indicators should not surprise anyone. But what is surprising is the complete lack of understanding of most fundamental growth drivers by the political leadership and those entrusted with planning for India's future, and the magnitude of effort and resources required to provide a growth thrust to the (currently) 1.25 billion inhabitants of the nation.

Beyond the fiscal deficits, lending rates and taxationslabs, India's future is and would continue to be determined by how the nation grapples with rising deficits in 12 major areas that consist of education, healthcare, water, energy, food, land, housing, sanitation, non-industrial waste handing, mass rapid transport system for its rapidly-growing million plus population cities, intra country transport, and internal security.

With the 21st-century world widely claimed to be a 'knowledge' — and, increasingly, 'technology' — driven one, a sharp focus on education — primary, secondary, higher and vocational — would have been one of the top priorities of all governments. Yet, the gap in absolute terms has continued to increase since 1951, and has actually increased the most since 1991.

India had about 12.1 million primary education seats in 1951 against the requirement of about 45 million (to achieve 100 per cent school enrollment). In 1991, the number of seats had increased to about 44 million, but the required capacity had shot up to 116 million, i.e., a deficit of almost 72 million. In 2001, the deficit increased to about 74 million. In 2011, the government's own data shows a deficit of about 60 million even though many rural (and urban) schools effectively exist only on paper. The seat gap has hardly budged in absolute numbers — at around 60 million seats — since 1981 at middle and high-school levels.

Using CBSE norms, this translates to a requirement of about additional 7.75 million teachers, 900 million sq ft of additional building space, about $250 billion in additional capital expenditure and about $75 billion in annual operating budget by 2021.

The situation is bleaker when it comes to higher education. At about 12 per cent (about 17 million enrolment), India currently has amongst the lowest Gross Enrollment Ratios (GER) not only compared to the developed nations but even the major developing ones (though the government has recently tried to change its own definition of GER and claims that it is closer to 18 per cent).

In a knowledge- and specific skills-driven world, India should be aspiring to come closer to 40 per cent, but even if it were to first target a GER of 30 per cent by 2021, an additional 36 million seats would have to be created.

Analysts' views: IIP shrinks by 0.6% in December

MUMBAI: The industrial output in December contracted 0.6 percent, the government said on Tuesday, surprising expectations for a growth of 1.1 percent forecast in a Reuters poll. 

COMMENTARY 

JYOTINDER KAUR, ECONOMIST, HDFC BANKBSE 0.87 %, MUMBAI 

"This is yet another indication that while things could have bottomed out, the past recovery is considerably far away. High inflation is impinging on purchasing power and so industrial growth is slowing, while the government is clamping down on expenditure which is certainly not helping growth. So all this is not a pretty picture. Despite incremental efforts we are still staring at weak growth print. We expect rate cut in March as growth is consistently surprising on the downside while pace of CPI (consumer price inflation) has stabilised." SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI "What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought. This, with FY13 advance GDP estimates, clouds the outlook for FY14 growth. We now think that FY14 growth may be between 5-6 percent. "We stick to our call that the RBI will lower the repo rate by 75 basis points in the rest of 2013."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI 

"IIP growth has been in negative zone in December on the back of continued weaknesses in investment and consumption demand as is reflected in the strongly negative growth in capital and consumer durable goods.

"Today's reading is supportive of the CSO estimate of 5 percent GDP growth for FY13. Addressing risks to growth will be the main priority for the RBI and the government in the coming months."

SHAKTI SATAPATHY, FIXED INCOME ANALYST, AK CAPITAL, MUMBAI 

"The negative data is a bit surprise and is expected to be rate positive for forthcoming policy meet of RBI. Further the downward revision in the November data reiterates subdued investment sentiment. Although the sluggish IIP might prompt for a repo cut in the next policy meet, the rising CPI & underlying threat on the crude & food prices would leave a lesser room for further rate cuts in the next fiscal year."

ANJALI VERMA, ECONOMIST, PHILLIPCAPITAL, MUMBAI 

"It is now an understood fact that the government's reform announcements are long-term positive. In the near term, the government needs to hurry up with project clearances to get industry back on track. However, I still think that 5.4 percent GDP growth for FY13 is feasible unless things worsen in the March quarter.

"I think the RBI's next move will be another 25 basis points easing in the repo rate in March or April."

SIDDHARTHA SANYAL, INDIA ECONOMIST, BARCLAYS CAPITAL, MUMBAI 

"Given that the IIP is weak across the board and also that the November number has been revised sharply downwards, it seems that the change is statistical in nature, in the sense that there is some adjustment in the base year.

"But going ahead downside risks to growth exist due to the government cut in spending and this is pertinent more to the services sector where government spending has a big role. I think for RBI, WPI (wholesale price index) number and the trade numbers will be more crucial to decide on future rate cuts."

Subbarao warns of record current account deficit

MUMBAI: Reserve Bank Governor Duvvuri Subbaraotoday cautioned the country was headed for the highest ever current account deficit this fiscal, after it rose to 5.3 per cent of GDP in the second quarter. 

"Last year, CAD was 4.2 per cent of GDP, but this year we expect it would be significantly higher than that. It's going to be historically the highest CAD measured as a proportion of GDP," the Governor said, though he refrained from giving any figure. 

He also expressed concern over the way the CAD, which is the gap between forex gained and forex spent, is being financed by volatile inflows instead of more foreign direct investments. 

Subbarao was addressing the convocation ceremony of the RBI-set up Indira Gandhi Institute of Development Research (IGIDR) here. 

The trade gap is widening mainly because of higher import of oil and gold. The third quarter numbers are expected later this week. 

Flagging his concerns over CAD, which was the overriding theme of the third quarter monetary policy announced on January 29, Subbarao said these were regarding its level, quality and the way it is being financed. 

"We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold. 

"The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ideally be getting as much of FDI as possible to finance the CAD. On the other hand, what we are getting is a lot of volatile flows to finance it," Subbarao said. 

In FY12, after hitting a high CAD of 4.3 per cent, which was then a record, CAD had declined to 3.9 per cent of GDP, though it was 10 bps above the year ago period.

World Bank chief economist calls on G20 to coordinate policies

WASHINGTON: The World Bank's new chief economiston Tuesday urged Group of 20 finance leaders to better coordinate economic policies in order to prevent a possible global currency war. 

In an interview with Reuters, Kaushik Basu said G20 finance ministers, meeting in Moscow on February 15 and 16, should act on a solution before escalating tensions spark another global economic crisis. 

While the risk of a sudden plummeting of the global economy had diminished because of measures adopted in Europe to ease its sovereign debt crisis, a rapid bounce-back in growth was unlikely, he said. 

"We are not in a currency war but could be inching towards one," said Basu, a former chief economic adviser to the Indian finance ministry. "Global leaders need to coordinate policy to prevent either (one) from happening or markets believing it is happening. Such coordination is entirely within the realm of the possible; all it needs is determination." 

He said that, while unconventional monetary policy measures by central banks in the United States, Japan and Europe to revive growth had proved valuable, the impact of those policies was "beginning to feed into the global situation". 

"The need is for some global monetary and fiscal policy coordination and the G20 is the forum that could push on that, and I think it ought to take that task seriously," he added. 

Advanced economies have ramped up debt and printed money, which has weakened some of their currencies and made them more competitive. Meanwhile, near-zero rates in the rich world have exacerbated the problem of hot money flows for emerging markets with high interest rates and driven up their exchange rates. 

A NEW NORMAL? 

Most recently, tensions have increased over aggressive expansion of monetary policy by Japan's new government, which it says is aimed at beating deflation. But U.S. and European officials have grown concerned about comments from Japanese officials that suggest Tokyo is targeting a specific level of the yen, which has lost about 20 percent against the dollar since October. 

"You need a minimum amount of collective agreement on these policies so that if the Fed acts, or the Bank of Japan acts, central banks in other major economies, such as China, India and Indonesia, are able to take a more or less supportive position," Basu said, adding: "For that you need a collective conversation." 

The global crisis has reduced high rates of growth in emerging market economies like China, but the slowdown did not signal a "new normal," Basu said. 

"I do believe there is a shifting of global gear that is going on - and you won't see it just now - but if you do prospecting for three to four years, a couple of emerging economies will come out as the growth drivers of the world," he said. 

While China, India, Indonesia and Brazil are leading emerging economies, several African economies have adopted economic reforms that have fueled investor interest and boosted growth, he said. 

Basu said trade among emerging economies was increasing, while savings and investment rates were rising in middle-income countries, which would support stronger economic growth. 

"Eventually, I expect industrialized countries to go back to slightly higher growth, which for them is fine because they are already developed, and I expect some emerging economies to get back to between 8 and 9 percent growth, which they had before the global financial crisis," Basu added

G7 looks to calm fears over currency war

LONDON: The Group of Seven nations are considering releasing a statement on exchange rates this week to calm concern the world is on the brink of a currencywar, three officials from G-7 countries said. 

Finance officials from the world's major industrial economies have drafted a text now being reviewed by senior policy makers, one official said on condition of anonymity. The current wording, which still may be changed, contains a commitment to market-set exchange rates and an agreement that governments don't use fiscal or monetary policy to drive currencies, the official said. 

Japanese prime minister Shinzo Abe's push for more aggressive monetary policy has raised concern abroad that his government is directly seeking to weaken the yen, something it denies. In the talks, Japan has questioned the statement's contents because it doesn't want to be singled out for criticism, another official from a G-7 nation said, also on the basis they not be named. 

The G-7 is looking to release the statement before a February 15-16 meeting in Moscow of finance ministers and central bankers from the Group of 20, which includes the G-7 and emerging markets such as Brazil, China and India. 

Any pledge not to target currencies when setting policy would mark a strengthening in stance from when the G-7's finance chiefs last commented on currencies as a group in September 2011. The Wall Street Journal earlier reported the G-7 was debating a statement. 

The yen has weakened 13% against the dollar since mid-November in anticipation of monetary stimulus advocated by Abe, who took office in December. 

His campaign has drawn statements of concern from Germany to Canada as officials fret a weaker yen could harm their exporters. Canadian finance minister Jim Flaherty last month that he'd spoken to his Japanese counterpart, Taro Aso, to signal his concern.

G7 expected to release statement to cool currency rhetoric

LONDON: The Group of Seven nations are considering issuing a statement this week reaffirming their commitment to "market-determined" exchange rates in response to heating rhetoric about a currency war, twoG20 officials said on Monday. 

The two officials, from different countries, told Reuters that if agreed, the statement could be released around the time G20 finance ministers and central bankers meet in Moscow on Friday and Saturday. "It focuses on a commitment to market-determined exchange rates and (governments) not using policies to drive currencies," one official said. 

The language could be subject to change but reads very similarly to the last statement issued by the G7 on currencies in 2011. Then, it affirmed support for market-determined exchange rates and pledged: "We will consult closely in regard to actions in exchange markets and will cooperate as appropriate." 

Several countries have reacted with alarm to aggressively expansionary monetary policies urged by Japan's new government, which have prompted the yen to weaken sharply. Last week, France went as far as calling for a medium-term target to be set for the euro. Berlin rejected that suggestion and said it did not view the currency as being overvalued as things stand. 

European Central Bank chief Mario Draghi indulged in a bit of gentle verbal intervention last week, saying he would monitor the impact of a strengthening euro, which was enough to stop the currency in its tracks temporarily. 

The Federal Reserve and Bank of Japan are expanding their balance sheets rapidly by printing money, while the ECB's balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year. 

All else being equal, that could drive the euro yet higher as others explicitly or implicitly follow policies that will drive their currencies down - the last thing a struggling euro zone economy needs. 

The EU's top monetary official, Olli Rehn, called at the weekend for "closer coordination" on currencies, noting the particular problems a strong euro would pose for southern, highly indebted members of the euro zone. On the other hand, ECB policymaker Joerg Asmussen said France's problem was its internal competitiveness, not the euro. 

The pain will be just as acute in emerging markets. As newly minted cash pours into developing economies in search of higher yields, either their exchange rates will rise, making exports less competitive, or they will have to cut interest rates and/or intervene to hold down their currencies. That could fuel credit and asset price booms that sow the seeds of inflation. 

Brazilian Finance Minister Guido Mantega, the man widely credited with coining the term currency war, told Reuters last week that it could get even worse if Europe joins the fray. The issue will be discussed in Moscow but officials do not expect Japan to come under any serious pressure at this stage. 

ECB set to keep interest rates on hold

FRANKFURT: The European Central Bank is expected to withstand pressure from hard-pressed businesses to cut interest rates again when it meets Thursday. 

Even though the economy of the 17 European Unioncountries that use the Euro is in recession, there have been recent positive signals from forward-looking surveys. 

As a result, the central bank, headed by Mario Draghi, is expected to keep its benchmark interest rate at the record low of 0.75 percent. 

At his ensuing press conference, Draghi is likely to face questions about the recent strength of the Euro. The appreciating currency stands to make life even more difficult for Europe's exporters. 

Draghi has been widely praised for helping to ease market concerns over Europe's debt problems. 

The Bank of England is also expected to keep rates on hold. 

G20 should give clear signal there is no currency war: Timothy Adams, IIF Chief

WASHINGTON: Finance ministers from the Group of 20 nations should send a clear signal to financial markets this week that they are coordinating policies and not embroiled in a "currency war," the head of a global banking group said on Monday. 

"Right now there seems to be a bit of a message void and that message void is filled by whoever has the microphone on a particular week," Institute of International Finance Managing Director Timothy Adams told a news conference. 

Adams, who served as U.S. Treasury undersecretary for international affairs during President George W. Bush's administration, dismissed the idea that current tensions over foreign exchange rates amount to a "currency war." 

The Group of Seven rich nations are considering a statement this week reaffirming their commitment to "market determined" exchange rates. 

The tensions have been prompted by Japan's aggressively expansionary monetary policies, which have weakened the yen sharply. 

"I don't think it's a currency war, maybe it's a slight skirmish," Adams told reporters. "It is less to do with policymakers targeting the exchange rate and more about policymakers trying to implement policies to deal with domestic conditions." 

"Policymakers still need to cooperate and communicate how they are going about it because markets are interpreting it as an effort to manipulate exchange rates," he added. "Whether it was intended or not, it has happened that way, and policymakers need to communicate to markets that is not their intention and better explain to markets what they seek to achieve and do it in a way that minimizes potential volatility," he Adams said. 

Risks too high to shift currency stance: Swiss bank

ZURICH: The risks for Europe's economy remain too serious to allow Switzerland's central bank to change its currency cap, a member of its governing body said in an interview published on Monday. 

"The economic environment worsened again at the end of last year and the growth outlook was lowered," Fritz Zurbruegg told the daily Aargauer

Zeitung, adding that exchange-rate risks were still on the cards as a result. 

"For that reason, the minimum exchange rate remains key," said Zurbruegg, who joined the governing body of Switzerland's central bank in August 2012. 

In September 2011, the central bank fixed a minimum exchange rate of 1.20 Swiss francs to the euro. 

Investor flocked to the Swiss franc, traditionally regarded as a safe-haven currency, as worries grew over the debt crisis in the eurozone. 

An overvalued franc hurts the competitiveness of Swiss industry, however, thereby harming exports, and concerns about the economic impact drove the central bank to step in in 2011. 

But with the recent revival of the long-embattled euro, the Swiss franc has lost strength, trading over recent days at close to 1.23. 

That has fuelled speculation that the central bank could raise the floor. 

Zurbruegg declined to say whether the bank was considering such a move, saying the minimum rate remained an important. 

"We introduced the minimum rate to stem the rapid, major appreciation of the Swiss franc. We achieved that goal and we defused the risk of a deflationary trend," he said. 

He said that the Swiss franc nonetheless remained overvalued against the euro. 

"The minimum exchange rate is an exceptional measure, not a tool for adjusting monetary policy," he said. 

"The minimum exchange rate remains the most appropriate instrument for price stability in the foreseeable future," he underlined.

US economy picks up, China, India might slow: OECD indicator

PARIS: Economic activity in the United States is rising, in the Eurozone it is steadying, but in China andIndia the growth trend is slowing, leading indicators from the OECD showed on Monday. 

The Organisation for Economic Cooperation and Development said that its index of leading indicators suggested that economic growth in the United States was "firming". 

Activity in Britain was also firming but at a slower pace than seemed to be the case a month ago, the OECD said in its monthly report on composite leading indicators which are considered a reliable pointer to activity in six months' time. 

In Japan and Brazil signs were emerging "of growth picking up." 

For the 17 members of the eurozone, and notably inGermany and Italy, the leading indicators "point to a stabilisation in growth prospects" but in France "growth is expected to remain weak." 

The OECD, which is a policy forum for 34 advanced economies but also monitors some other important economies, said that China and India appeared to be on a growth path but "below trend compared with more positive signals in last month's assessment." 

The indicators for Canada and Russia continued to signal growth that was below trend, the OECD said. 

French official industrial output slumps 2.2% in 2012

PARIS: French industrial production fell by 2.2 percent in 2012 from the level of output in 2011, the national statistics institute INSEE told AFP on Monday. 

Output by the manufacturing sector, excluding production by the energy and mining sectors, fell by 2.7 percent, an official at INSEE said after calculating the annual figure including the data for December published earlier on Monday. 

The French government is increasingly worried about low growth and signs of severe strains in the industrial sector, with deep problems in the auto industry being the latest example. 

The country is running a near record structural trade deficit, and the government has introduced measures to try to improve the competitive position of industry by switching part of payroll charges to general taxation. 

The INSEE official calculated the performance for the whole of 2012 after the agency had published data for December and the last quarter for 2012. 

Industrial production fell sharply in the fourth quarter, by 1.8 percent from output in the third quarter. 

In the manufacturing sector, output fell by 2.5 percent, the data showed. 

On a monthly basis, industrial output was almost flat in December falling by 0.1 percent from the level in November when it rose by 0.5 percent,

the data showed. 

Output by the manufacturing sector, excluding activity by the energy and mining sectors, was also about steady, rising by 0.1 percent as in November. 

In the last quarter compared with output in the third quarter, production by the sector making equipment for transportation fell by 5.5 percent and for refining by 9.1 percent. 

Output of electrical, electronic, computer equipment and machines fell by 2.3 percent, and production of other industrial goods fell by 2.6 percent. 

But production by the agriculture and food industries rose by 0.8 percent. 

On a 12-month basis, output in the last quarter by the manufacturing sector fell by 3.9 percent. 

Greece cuts investments to hit Jan budget target

ATHENS: Greece cut tax refunds and curbed public investments in January to offset a slide in tax revenues and meet its budget targets, the government said on Monday. 

Gross tax revenues fell 241 million Euros short of expectations due to falling VAT receipts in the context of the country's crippling recession. Revenues sank 11 percent year-on-year to 4.42 billion Euros. 

Hurt by the government's austerity programme, Greek retail sales are plunging at double-digit rates, thus reducing indirect tax receipts. 

To compensate for the unexpectedly large decline, the government slashed tax refunds to 45 million Euros, compared with a 311 million euro target. It also spent just 67 million Euros on public investment projects, less than the interim 200 million euro target. 

"The balance was positive in January but there's no room for complacency," Deputy Finance Minister Christos Staikouras said. "Attention and intensification of effort is required on the revenue side." 

Overall, the central government budget, which excludes spending by local authorities and social security organisations, posted a surplus of 159 million Euros ($213 million) compared to a deficit of 490 million Euros in the same month last year, according to Finance ministry figures. 

The primary surplus - excluding interest payments on the country's debt - stood at 398 million Euros, compared with a deficit target of 413 million Euros. 

Mired in recession, Greece has been struggling to meet targets set under two bailouts since 2010 that total 240 billion Euros ($321.1 billion). 

Many doubt the government will be able to continue using cutbacks to meet its budget goals. 

"Investors do not believe we can meet those targets," said Takis Zamanis, chief trader at Athens-based Beta Securities.

US economy in much better shape than 4 years ago: White House

WASHINGTON: The US economy is in much better shape than it was four years ago, but the progress made is not irreversible and the nation still has a long way to go, the White House has said. 

"The (US) economy is not in a worse place than it was before. If you talk about the comparison between now and when he (US President Barack Obama) gave his first State of the Union address, there is no comparison," the White House Press Secretary, Jay Carney, told reporters at his daily news conference last night. 

"We were in economic free fall. We are at a moment when the economy is poised to continue to grow, to continue to build on the progress we've made, to continue to build on the job creation over 6.1 million jobs created by our businesses over the past 35 or 36 months," he said. 

Obama in his State of the Union Address last night said he will continue to focus on economy and job creation.

"I've said many times that his principal preoccupation as President has been the need to first reverse the devastating decline in our economy. 

"Then to set it on a trajectory where it's growing in a way that helps the middle class, makes it more secure, and makes it expand so that those who are trying to reach into the middle -- to climb the ladder, if you will, into the middle class -- have that opportunity. 

"That is absolutely going to be his focus in the second term as it was in the first term," Carney said. 

"The President's principal preoccupation since he ran for this office, beginning in 2007, has been what we need to do to make our economy work for the middle class, to help expand the middle class; to give average Americans the opportunities they need to help this economy grow and to help it be as strong and dominant in the 21st century as it was in the 20th," he said.

US poised for self-sustaining, broad-based growth: Brainard

WASHINGTON: Confident of improving the job prospects for rising middle-class in the country, the US has said it will continue to push for stronger job creation as it is poised for self-sustaining, broad-based growth. 

"The United States is poised for self-sustaining, broad-based growth. We will continue to push for stronger job creation and rising middle-class incomes," Lael Brainard, US Undersecretary of the Treasury for International Affairs said yesterday. 

"President (Barack) Obama is committed to a balanced approach for deficit reduction that delivers on debt sustainability while giving the private sector the support it needs to invest and create jobs," she said. 

During election campaigns and in debates last year Obama have pitched for better job opportunities for youngsters and promised for better future in the countries. 

Adding she mentioned that US has managed a steady pace of fiscal withdrawal over the past three years, reducing the deficit by an average of more than one percentage point of GDP per year while at the same time protecting the recovery. 

"According to new projections released by the CBO ( Congressional Budget Office), the deficit as a share of GDP is projected to decline to roughly half the share in 2009," the Treasury Official said, adding that in the months ahead, the US will seek balanced deficit reduction to put the debt-to-GDP ratio on a sustainable path. 

Noting that the US President remains committed to finding reductions in a balanced way, she said it is important to avoid sequestration, which is a blunt and indiscriminate instrument that poses a serious threat to national security, domestic priorities and the economy. 

Private sector activity has now expanded for 14 consecutive quarters and the US is growing faster than most other advanced economies despite the deep damage from the financial crisis and headwinds beyond its shores, Brainard observed. 

The private sector she said, has been adding jobs for 35 straight months now for over six million jobs in total. US banks are better capitalised and more conservatively funded than before the crisis and once again providing credit to support business and consumers. 

"There's gathering strength across a broad spectrum of the economy: housing, energy, autos, high tech, manufacturing and agriculture. US energy costs have fallen, and companies are once again looking to the US as the premiere destination for investment," the Treasury official said. 

"In Europe, we've seen the Central Bank and leaders join together in support of a strategy to ensure countries undertaking reforms retain access to market financing and assure banks have access to liquidity and hold credible capital," she said. 

"With the OMT and the ESM, European fiscal and monetary authorities have convinced markets of their commitment. Work is under way to move to common supervision of the largest banks," she said adding that over the medium term, the institutions of the euro area must be further refined to provide foundations for growth and resilience. 

In Japan, we're seeing a commitment to end deflation and reinvigorate growth. It will be important that structural reforms accompany macroeconomic policies to achieve these goals, she said.

US budget deficit estimated at $845 bn

WASHINGTON: The US budget deficit will drop below $1 trillion for the first time in President Barack Obama's tenure in office, a new report said on Tuesday. 

The Congressional Budget Office analysis said the government will run a $845 billion deficit this year, a modest improvement compared to last year's $1.1 trillion shortfall but still enough red ink to require the government to borrow 24 cents of every dollar it spends. 

The agency projected that the economy will grow just 1.4 percent this year if $85 billion in across-the-board spending cuts take effect as scheduled March 1.Unemployment would average 8 percent. Obama wants to ease the cuts by replacing them with new tax revenue and alternative cuts, but a clash is looming with Republicans who insist that last month's tax increase on wealthier earners will be the last tax hike they permit. 

The report predicted the deficit would dip to $430 billion by 2015, the lowest since the government posted a $459 billion deficit is former President George W. Bush's last year in office. That would be a relatively low 2.4 percent when measured against the size of the economy. 

But deficits would move higher after that and again reach near $1 trillion in the latter portion of the 10-year window, despite the recently enacted tax increase on family income exceeding $450,000 and automatic spending cuts of about $100 billion a year. The package of spending cuts and tax increases are punishment for Washington's failure to strike a long-term budget pact. 

``We need to continue working to cut spending responsibly, protect and strengthen programs like Medicare, and raise revenue by closing tax loopholes that the wealthiest Americans and biggest corporations take advantage of,'' said Senate Budget Committee Chairman Patty Murray, a Democrat. Over the coming decade, the deficit would total $7 trillion. 

The report provided fresh fodder for Washington's familiar battles over the budget, deficits and debt. Obama inherited an economy in crisis and first-ever deficits exceeding $1 trillion. The 2009 deficit, swelled by the costs of the Wall St. bailout, hit a record $1.4 trillion, while the deficits of 2010 and 2011 both registered $1.3 trillion. 

Economists says that too-high deficits and debt are a drag on the economy and could eventually precipitate a fiscal crisis like many European countries are experiencing. The economy will grow slowly in 2013 and more rapidly next year, with unemployment projected to stay high, according to the report. 

This year's growth is being hampered by a tax increase enacted in January and by automatic spending cuts scheduled to take effect this spring. CBO projects the economy will grow by just 1.4 percent this year but recover to 3.4 percent next year. 

Unemployment is projected to stay above 7.5 percent through next year. That would be the sixth straight year above that level, the longest period of such high unemployment in 70 years, the report said. 

Without the government's fiscal tightening, which includes the expiration of Obama's two-year, 2 percentage point cut in payroll taxes and the imposition of the automatic spending cuts, economic growth would be about 1.5 percentage points higher this year, the report said. However, CBO warns that future growth would be constrained if the government doesn't reduce future deficits. The report warns that actual deficits could easily be higher since CBO is required to assume Congress sticks to the letter of the law. 

The report says that health spending will continue to grow as Obama's health care law takes full effect. CBO said spending on major health care programs will surpass Social Security in 2014, as Obama's push to cover the uninsured goes into high gear. Major health care programs include Medicare, Medicaid, children's healthinsurance and the new subsidies to help uninsured Americans get coverage. 

China okays tax reforms to make rich pay more, tackle inequality

BEIJING: China unveiled sweeping tax reforms on Tuesday to make wealthy state-owned firms, property speculators and the rich pay more to narrow a yawning gap between an urban elite and hundreds of millions of rural poor.

The plans approved by the State Council - China's cabinet - also included commitments to push forward market-oriented interest rate reforms to give savers a better return and more security. Chief among the reforms is a requirement to raise the percentage of profits contributed by state-owned firms to the government by about 5 percentage points by 2015.

Together with measures to raise wages and improve households' return on assets, the reforms signal an attempt to shift economic growth towards increased consumption and away from the current reliance on investment spending.

"The State Council is not just talking about the gap between rich and poor, they're talking about the wholeeconomy and how income is distributed among various actors - the households, the corporations and the government," said Andrew Batson, research director of GK Dragonomics, an economic consultancy in Beijing. "It's about changing the entire flow of income around the national economy."

One key change will make interest rates more flexible. Interest rates on savings deposits have lagged inflationfor many years, depressing returns for households and pushing those who can afford it to more speculative investments.

"Push forward market-oriented interest rate reform, appropriately expand the floating range for interest rates on deposits and loans and protect depositors' interests," the announcement said. It also called for "building a long-term mechanism" to boost rural incomes, and reiterated previous pledges to raise incomes, particularly for the poor. Citizens would see more opportunities to earn money from assets, including increasing fund products, and expanding income from rents, dividends and bonuses.

And rural migrants will get more opportunity to transfer their official residency to cities, where wages and social services are better.

Trimming the power enjoyed by state-owned firms was top of the list of structural reforms submitted by think-tanks ahead of the November change of leadership in the ruling Communist Party.

State-owned firms generally transfer only a small portion of their profits to the state, but have come under increasing pressure from reformists who believe they benefit from too much support which the private sector does not share.

These profits are seen as a potential source of funding as China builds pension, health insurance and other systems to create a social safety net for its citizens.- Reuters

Swiss franc lower against euro amid cautious euro zone optimism

URICH: The Swiss franc weakened against the euro on Wednesday, which benefited from cautious optimism for the euro zone's recovery. 

The euro resumed its uptrend despite a call from French President Francois Hollande to protect the currency from "irrational movements", while a survey on Tuesday showing the euro zone's economy is probably recovering also helped the euro rise. 

Closer to home, Swiss National Bank board member Fritz Zurbruegg said on Tuesday he expects interest rates to start moving up again once economic growth recovers, ruling out a move into negative policy rates. 

"The latest comments by SNB directorate member Zurbruegg hitting the wires on Tuesday do not make a case for a change in the SNB's monetary framework anytime soon," UBS economist Reto Huenerwadel said. 

After more than a year of trading close to the 1.20 per euro cap imposed by the Swiss National Bank, the franc weakened through the 1.25 per euro mark in January for the first time since May 2011 on improving euro zone sentiment. 

But the franc is still seen as overvalued and Swiss exports fell in December, data showed on Tuesday, dragged down by weak demand from the country's top trading partner Europe. 

"Fitting with Zurbruegg's rather cautious global growth outlook characterised by 'spare capacities in many countries, including Switzerland,' the SNB does not seem to be preoccupied with heightened inflation concerns for now," UBS's Huenerwadel said. 

Swiss interest rates remain at rock bottom, with the SNB's target for the key three-month Libor rate 0.00-0.25 per cent. 

The franc fell 0.5 per cent against the dollar to trade at 0.9127 by 0742 GMT compared to the New York close. 

The franc was 0.2 per cent lower against the euro, trading at 1.2357.

Sterling pinned down to 6-month lows versus dollar

LONDON: Sterling weakened on Wednesday to near a six-month low against the dollar, with some investors betting on further losses if new central bank chief Mark Carney flags more aggressive policy easing to support the UK economy. 

Carney, who takes over from Mervyn King as Bank of England governor in July, will testify to a parliamentary committee on Thursday, when the bank will also announce an interest rate decision. Earlier this year, he said monetary policy was not "maxed out" in major economies and there was room to do more. 

Carney, who is outgoing governor of the Bank of Canada, has also suggested targeting nominal growth rather than inflation, as the British central bank does at present. 

Investors including some U.S.-based hedge funds have taken his comments as signals that he could lean towards more quantitative easing and stepped up selling of the British pound in recent sessions. Quantitative easing involves printing money and tends to weigh on a currency as it increases its supply. 

"There is pressure to sell sterling and the market is looking for some kind of policy direction from Carney. One governor is going and another coming and this isn't exactly helping," said Stuart Frost, head at fund managers RWC Capital. 

"If UK data disappoints, we could see sterling drop in coming months but there is plenty of support at $1.52-$1.53." 

The pound was down 0.1 per cent on the day to $1.5640, having hit $1.5630 on Tuesday, its lowest in six months. Traders reported option expiries at $1.5630 with bids below that. Option barriers are cited at $1.5600. 

The euro was down 0.3 per cent at 86.53 pence, taking a breather from a rally which had taken it to a 15-month high of 87.17 pence late last week. The euro has also been weighed down by increased rhetoric from European politicians who are complaining about the adverse impact from a higher currency. 

Investors are waiting to see if the European Central Bank will also express its discomfort with a firm euro, although chances are pretty slim, given trade-weighted euro has risen by just 3 per cent since early January. 

ECB chief Mario Draghi will address a press conference on Thursday after a rate decision and is likely to be quizzed about the buoyant euro. 

The ECB is the only major central bank which is withdrawing some of its unconventional monetary stimulus at a time when the U.S. Federal Reserve, the Bank of Japan and even the Bank of England are either printing more money and expanding their balance sheets or likely to do so in the coming months. 

Analysts said that while sterling could rally if Carney does not sound as dovish as some are expecting, any bounce is unlikely to be sustained given concerns about the UK economic outlook and risks of a rating downgrade. 

Data on Wednesday showed British house prices dipped on the month in January, in line with expectation. They rose from a year earlier, but fell short of analysts expectations of a 1.5 per cent rise.

India's long-term growth potential rate is 7%: Goldman Sachs

NEW DELHI: Global investment banking majorGoldman Sachs believes the long-term potential growth rate of the Indian economy is 7 per cent and this could be notably higher provided the reform process gains momentum. 

"Although we feel the current long-term potential growth rate of the economy is 7 per cent, this could be notably higher if the reform process were to gain momentum," Goldman Sachs said in a research note. 

According to the research note, India is expected to clock 6.5 per cent real growth in 2013, which would rise to 7.2 per cent in 2014 and further to 7.5 per cent in 2016. 

India has been growing at an impressive rate of 9 per cent before the global financial meltdown pulled the growth rate down to 6.7 per cent in 2008-09. 

Goldman Sachs lauded the recent reforms initiatives and said "the key to unlocking India's potential growth has been, and remains in, the area of reforms." 

In recent times, the Indian government has unveiled a slew of reforms including FDI relaxation in retail and aviation sectors and partial de-regulation of diesel prices. 

"To continue the imbalance correction process, and keep attracting foreign capital, the government would do well to increase the efficiency of the economy through deregulation and reform," Goldman Sachs said. 

Notwithstanding the fact that a wide variety of initiatives are necessary, many of the reforms are likely to generate significant political resistance. 

"Since India is a largely domestic economy, reform will usually cause friction with existing interests, which tend to resist reform, even though the

net effect for the country should be positive," the report said. 

Goldman Sachs said it continues to be overweight on India as the the domestic economic picture appears to have bottomed and is inflecting upwards. 

The global economy is also improving, led by a rebound in EM growth and a number of difficult reform measures have been passed, and momentum is positive, it added. 

According to the report, the challenges that India faces can be categorised into three areas: governance /efficiency, the fiscal and current account deficits, and infrastructure. 

Regarding the widening current account deficit, Goldman Sachs said India's structural current account deficit, which is necessarily funded by capital account inflows, needs to diminish, or the country will be open to sudden shocks like the balance of payments crisis of 1991

6 FEB, 2013, 01.24PM IST, ET NOW 

Expect economic recovery to be sluggish in India: Nigel Chalk, Barclays

In an interview with ET Now, Nigel Chalk, Head of Emerging Asia Research, Barclays, shares his views on the Asian markets and his expectations from theRBI in the next monetary policy. Excerpts:

ET Now: How do you view growth in emerging Asian markets in 2013? Do you see demand picking up or do you see high inflation really having a big impact?

Nigel Chalk: We generally see a better growth picture this year than last year. Our expectation is that growth really bottomed out in Asia in the third quarter of last year and since then, we have seen sequential better data. It has been particularly true in North Asia, China, Korea and Taiwan. That is where we see the greatest growth recovery.

We see much more sluggish recovery in India and in the ASEAN economies, they have been doing quite well through the last cycle. We think that stronger performance is going to continue into this year. Overall, our expectation is that growth in emerging Asia will be from six and a quarter per cent from last year up to about six and three quarter per cent this year. So that is a pretty decent growth environment given the very weak global environment.

ET Now: For emerging market Asia, what kind ofmonetary policy easing do you expect over 2013? How will the same impact global liquidity, according to you, as well?

Nigel Chalk: Generally, many of the central banks in emerging Asia have been loosening policy through last year in the context of a weak global environment. So now we expect that with very accommodative monetary conditions already in place, the central banks across Asia are actually going to be on hold for most of this year. There are a few exceptions. In India the central bank loosened policy in April of last year, but since then has not loosened policy and now the inflation is starting to come down. We think that has opened the door for the central bank in India to start loosening the policy providing a little more stimulus to economy.

You saw that in last policy meeting. We think that will continue through the course of this year in India and then at the other extreme, the ASEAN economies, as I said, have been growing very strongly through the course of this year. We are going to start seeing a little bit more inflationary pressure in some of those ASEAN economies later this year and by the fourth quarter, you might see monetary policy tightening in Malaysia and perhaps the Philippines, just because of rising inflationary pressures.

ET Now: So, what are your expectations from the Reserve Bank of India in terms of repo and CRR cut over next 6 to 12 months?

Nigel Chalk: Growth has been very pure, particularly relative to its historical averages, and inflation -- still relatively high in level terms -- has been coming down over the last 2-3 months. It has opened the door in January for the central bank to start loosening monetary policy. We think that monetary policy loosening will continue. In January, they lowered both the CRR rate and the repo rate. We expect CRR rate basically going beyond hold, but the repo rate will come down by another 75 basis points by mid-year.

RBI panel revives Manmohan Singh's 1992 idea of 'Gold Bank'

KOLKATA: Reserve Bank of India has suggested setting up a gold bank and introduction of gold-backed financial products to moderate gold import demand and put a leash on the widening current account deficit. 

RBI has released the final report of the panel on gold imports and gold loans Tuesday. It said financial products with returns akin to gold price appreciation and export restrictions on bulk importers would help in curbing gold imports. It wants banks to expand their gold jewellery loan portfolio to monetise the stocks of idle gold. 

India had imported $45 billion of gold in 2011-12, a 3% from the previous year although the physical imports fell 17% to 854 ton from 1,034 ton. India is the world's largest importer and consumer of the precious metal. 

Rough estimates suggest Indian household possesses some 18,000 ton gold. About 23% of all gold imported was for investment in India while 75% of jewellery is treated as investment, according to World Gold Council data. 

RBI is for designing instruments like inflation-indexed bonds that can provide real returns to investors to reduce gold buying spree. It said introduction of gold-backed financial products can unlock the hidden economic value in the idle gold in the economy. 

"Introduction of products like gold accumulation plan, gold linked account, modified gold deposit and gold pension product may be considered," the panel suggested. 

The high return on gold has lured consumers into buying the metal, reducing the availability of funds for financial savings. This trend has put added pressure on import demand 

As supply side measures, the panel suggested recycling of domestic scrap gold and putting idle gold reserves of gold exchange traded funds (ETFs) to productive use. 

While the panel is in favour of banks continuing their role as gold imports agencies, it suggested limits on the volume and value of gold to be imported in extreme situation. 

"Introduction of tax incentives on instruments that can impound idle gold may be considered like introduction of gold bonds," it said. 

The panel said there should not be any limit on advances against gold jewellery and gold coins by individuals but suggested higher capital adequacy ratio for NBFCs giving loans against gold as collateral and continuos monitoring on them. "There is a need to reduce the gold loan NBFCs' heavy borrowings from the banking system so as to reduce their interconnectedness with the formal financial system gradually,".

Greek economic mood slips in January; tough 2013 in store

ATHENS: Greeks became more pessimistic in January about their economic prospects, a survey showed on Wednesday, with a core sentiment reading holding close to a two-year high but well down on pre-crisis years.

The Foundation for Economic and Industrial Research(IOBE)said its sentiment index for an economy in its sixth straight year of recession fell to 85.8 points from an upwardly revised 86.9 points in December.

The index is based on consumer confidence gauges and readings on the business outlook in four sectors; construction, retail and services - for which readings improved last month - and manufacturing.

In 2008, before the economy lurched into crisis, its average reading was 98.6.

"The uncertainty noted in previous months has clearly abated as the continued funding of the economy by Greece's (EU/IMF) partners has built credibility, which is positively viewed by survey participants," IOBE said in its monthly survey.

But it said most survey participants expect 2013 will be especially difficult as the impact of the country's fiscal adjustment effort will affect the entire economy, particularly during the first half.

Based on the survey, Greek households remained the most pessimistic in Europe as increased taxes and cuts in pay and pensions weigh more heavily.

Greece's international lenders - its euro zone partners and the International Monetary Fund - agreed in December to disburse nearly 50 billion euros in bailout aid to keep the debt-burdened country afloat.

The aid was unlocked after Athens committed to a 13.5 billion euro package of savings and labour reforms to shore up public finances and improve its economy's competitiveness.

IOBE has said it expects the economy to remain in recession in 2013, with national output ( GDP) seen contracting by 4.6 per cent, weighing on unemployment which has already climbed to nearly 27 per cent.

Based on the survey, Greek households remain the most pessimistic in Europe, followed by consumers in Portugal and Cyprus, as increased taxes and cuts in pay and pensions become increasingly felt.

Euro not currently overvalued: German government

BERLIN: The euro is not currently overvalued andexchange rates should not be used to try and boost competitiveness, the German government said Wednesday, rejecting French calls for ways to cap the single currency's recent rise.

"The German government is of the conviction that the euro, historically speaking, is currently not overvalued," government spokesman Steffen Seibert told a news briefing.

"What we're currently seeing is a rise in the value of the euro which is a counter-reaction to the massive depreciation in the wake of the eurozone crisis," Seibert said.

Earlier in Paris, French Finance Minister Pierre Moscovici had said an overvalued euro hurts economic growth and the issue should be discussed among eurozone finance ministers and the group of 20 leading economies.

But Berlin sees no cause for alarm.

The latest rise in the euro "shows that financial markets' confidence in the euro is returning. That's not a bad thing," government spokesman

Seibert continued.

Germany believes that a currency's exchange rate should reflect its economic fundamentals "and flexible exchange rates are the best to way to achieve this," he said.

"I can only point out that both the G8 and the G20 separately agreed that it made sense for the markets to set exchange rates," the spokesman noted.

French minister Moscovici said that while the euro's recent rise was partly explained by the abatement of the eurozone crisis, the monetary policy of other countries was also to blame.

Moscovici said it is "legitimate" to discuss with European finance ministers what could be the fair value of the euro and the right way to get there.

But while Seibert acknowledged that the topic would likely be discussed, "from our point of view, exchange rate policy is not an appropriate tool to boost competitiveness.

"The effects of things like targetted devaluation tend to be rather short-term. You can't use it to achieve a lasting boost in competitiveness," Seibert said.

A day earlier, French President Francois Hollande had said the euro's value cannot not be left to the whims of the market.

Speaking to European Parliament in Strasbourg said "a single currency zone must have a foreign exchange policy otherwise it will see an exchange rate imposed on it (by the markets) which is out of line with its real competitive position."

The euro has strengthened sharply in the past few months as the eurozone appeared to have finally got the better of a debt crisis which at one stage looked likely to sink the whole project.

On Friday, the single currency hit $1.3711, a level last seen in mid-November 2011, stoking concerns that it could begin to hurt exports, a key growth driver at a time when the overall eurozone economy is struggling badly.

For several months some emerging countries have objected that monetary policy by leading central banks, in injecting liquidity into their own economies, tends to depress their currencies and amounts to a policy of competitive devaluation.

Analysts say that the policy of the European Central Bank is showing signs of being somewhat less relaxed and this is one factor tending to push up the euro.

Euro zone demand pushes German industry orders higher

German industrial orders climbed in December as demand from the euro zone rebounded, underscoring improving conditions in the currency bloc and the resilience of Europe's largest economy. 

The 0.8 percent rise in orders on the month backs up surveys showing stronger German business morale and offers further support to European Central Bank chief Mario Draghi's assertion that the euro zone economy will recover later this year. 

"These new order data add clear evidence that German industry has reached a turning point," said Carsten Brzeski, senior economist at ING. 

"It looks as if the new optimism of German businesses is based on facts and orders and not on hot air." 

The rise in orders was slightly below the mid-range forecast in a Reuters poll of economists for a 0.9 percent rise in the seasonally and price-adjusted figure published by the Economy Ministry on Wednesday. Orders fell 1.8 percent in November. 

The latest Ifo survey showed morale among German businesses improving in January to its highest in more than half a year and a purchasing managers' survey released last week showed the manufacturing sectorshrank slightly in January but output and new business grew. 

Wednesday's data show industrial orders from the euro zone rose by a hefty 7.0 percent in December, with countries using the shared currency placing 11.6 percent more orders for German capital goods, needed for example to boost factory productivity, and 7.0 percent more consumer goods. 

That was likely helped by an improvement in euro zone sentiment, which rose for a sixth straight month heading into February according to the latest Sentix survey, which also showed expectations rising to their highest level since June 2007, before the financial and debt crises struck. 

Domestic orders fell by 1.2 percent, driven by a 4.8 percent decline in consumer goods orders, putting a dampener on hopes that private consumption can prop up German growth. 

SIGNS OF RECOVERY Germany's economy shrank by 0.5 percent in the last three months of 2012, according to preliminary data, but economists see the economy eking out a little growth in the first quarter of this year and therefore escaping recession, defined as two consecutive quarters of contraction. 

"Together with a significant increase of the most important sentiment indicators, (today's data) suggest that the German economy will return to growth in the first quarter," said Christian Lips, an economist at NordLB. 

"We can even expect a marked acceleration in economic growth in spring," he added. 

The Economy Ministry said orders had picked up in the fourth quarter of 2012, boding well for industrial output this year. 

Combined with an improvement in business climate in the manufacturing sector, the orders data point to a foreseeable end to the weak phase in industry, it added. 

Recent data has shown Germany's private sector expanding at its fastest rate since June 2011, investor sentiment brightening, consumer morale taking a turn for the better and unemployment falling. 

Industrial output rose by a modest 0.2 percent in November and economists expect data due at 1100 GMT on Thursday to show it edged up by a further 0.2 percent in December.

Rupee set to rise modestly if reforms stick

BANGALORE: The rupee will strengthen slightly over the next 12 months, building on recent gains following a series of reforms by the government aimed at bringing its finances under control, a Reuters poll showed. 

Those long-awaited reforms were welcomed by investors and revived capital inflows that have helped the currency after it was ravaged in the previous two years, hitting a record low close of 57.16 in June last year. 

The survey of 32 currency strategists conducted Feb 1-6 showed a median forecast that 53.24 rupees would buy one U.S. dollar in a month, little changed from current levels, with the currency possibly dipping back to 53.50 in six months and then recovering modestly to 52.50 in a year for a gain of around 1 percent. 

The long run forecast was slightly weaker than that in the last poll in October, which showed the rupee at 52.39 per dollar in one month, 52.50 in six months and 51.70 in a year. 

"The rupee has dropped so much and so far that even if it makes half of those gains back, that will make rupee a stand out currency this year," said Vishnu Varathan, an economist at Mizuho Corporate Bank. 

Reform Pledges Spur Rebound 

The losses in rupee in the last two years were mainly because of policy ineptitude over tackling a wide current account deficit, fiscal slippage and falling investment leading to threats of a downgrade to junk India's sovereign debt by rating agencies. 

Since then the government has announced some measures like opening up the retail, banking and insurancesectors to foreign investors and small but important steps to reduce fuel subsidies to shore up its finances. 

That along with major global central banks ultra-easy monetary policies have driven investor appetite for riskier assets and helped capital inflows into emerging economies. 

After losing 3.5 percent in the full-year 2012, the rupee is Asia's best performing currency so far this year, firming more than 3 percent 

Foreign funds bought more than $4.5 billion worth of Indian shares and debt in January, helping the rupee gain 3.3 percent against the dollar in the first month of 2013, making it the best performing Asian currency. 

But it is only expected to gain slightly over a year as plenty of concerns still remain about the government's commitment to implementing policy ahead of general elections early in 2014. 

"We expect only a modest appreciation in rupee over the next year on continued capital inflows based on the government's reform approach," said Jyoti Narasimhan, a senior economist at IHS Global Insight. 

"But the political situation is not necessarily conducive to aggressive reforms and most of the pending reforms will need to be parliament approved." 

Commitment To Reforms Key 

Although Asia's third-largest economy is heading for its slowest growth in a decade, it is expected to regain some momentum in the coming fiscal year as the impact of recent reforms kick in and as the central bank eases monetary policy. 

The Reserve Bank of India cut its key repo rate for the first time in nine months by 25 basis points to 7.75 percent in late January. 

But the central bank struck a cautious note on further easing as it waits to see the government's upcoming budget and watches whether inflation and a worryingly high current account moderate as expected. 

Country's current account deficit widened to a record high of 5.4 percent of gross domestic product in the September quarter as export growth slowed more sharply than imports. 

Finance Minister P. Chidambaram has pledged to bring the country's finances under control and has slashed spending on welfare, defense and road projects, risking short-term economic growth and angering cabinet colleagues. 

But with general elections slated for early next year, there are questions raised about the government's commitment to policy implementation for fiscal consolidation. 

"The election and the pre-election climate will complicate policy making," Narasimhan said. 

The biggest test for the government to show its commitment towards its policies will be at the end of the month, when it unveils the federal budget for the fiscal year starting in April.

CAD: A slippery slope that may stop Reserve Bank of India in its tracks

The frequency with which a topic comes up in a discussion indicates the significance of it. By that yardstick, current account deficit takes the centre stage at the Reserve Bank of India policy making asinflation and fiscal deficit are pushed to the background.

The central bank governor Duvvuri Subbarao referred to the current account deficit, the excess of spending overseas over earnings, at least 22 times in a call with economists on January 30. That is up from five times during a similar call after the second quarter monetary policy in October. Alarm bells are ringing, but not loudly as yet.

The 25-bps reduction in key interest rates is not the beginning of a journey to a paradise of low-cost funds regime. Inflation may have eased to a three-year low and finance minister P Chidambaram may be more convincing than ever in containing the fiscal deficit, but it may not yet be enough to return to the ga-ga years of growth miracle.

External imbalances could put a spoke in economic revival. Just like an individual who keeps funding his consumption disproportionate to his earnings runs the risk of the lender shutting the tap, international investors who have been kind to the nation could do the same. "An out-of-control current account deficit can easily hit both growth and inflation by raising concerns among foreign investors and by forcing a sharp depreciation of the currency," says Jahangir Aziz, chief Asia economist at JPMorgan Chase, who forecasts the December quarter number at 6.5% of the gross domestic product.

"For the year as a whole, CAD is unlikely to fall below 4% of GDP as continued high gold demand and higher imports driven by modest recovery that most of us are expecting will keep the overall import growth pretty strong."

Imports have always been strong, thanks to distorted pricing of oil products and the economic mess that drove investors to gold when they wanted to preserve their earnings from getting eroded by high inflation. While oil is an indicator of economic expansion, gold is a drain on the economy with wealth going into unproductive purposes that get locked up in vaults.

Chidambaram has raised the import duty on gold to 6%, which accounted for 10% of trade deficit. The government has belatedly permitted oil companies to raise the prices of diesel, one of the two major components of subsidised fuel, the other being cooking gas.

At this point, both the measures appear to be too little and too late. The global liquidity wave is lifting asset prices, including commodities, again. Benchmark Brent crude oil prices have risen $5 per barrel since the government started taking baby steps on diesel prices in mid-January. Official import of gold may have slowed, but that has opened up the door for smugglers of the precious metal with customs officials catching huge quantities at regular intervals these days.

"While higher duties will probably reduce demand somewhat, unless fundamental causes of increased gold demand are mitigated, the effect is unlikely to be sustained," says Saugata Bhattacharya, economist at Axis BankBSE -0.58 %. That leaves the nation with one choice to set right the

external economy - exports. That depends on consumption demand in the West. The US economy contracted in the December quarter and consumer confidence in Europe is sliding, thanks to the unemployment rate of more than a fifth in countries such as Spain and Greece.

"The CAD may stay elevated in the near-to-medium term without the prospect of any quick recovery of exports," says Siddhartha Sanyal, economist at Barclays. "The Imports Bill will likely depend critically on global commodity prices as the imports volume for critical imports such as oil is unlikely to soften quickly."

Indian exports have plunged for eight straight months. Indian services, which have been a pillar for nearly two decades, are cracking. Services exports have slowed sequentially over the last three quarters. But imports are still on the rise, worrying policy makers.

"There is also another concern about CAD, which is not so much discussed, which is the quality of CAD," Subbarao said. "If we had a high current account deficit because we were importing capital goods. But if we are having a high current account deficit because we are importing a lot of diesel where demand is not price-elastic and we are importing a lot of gold, then that is a concern.''

India has been lucky. The Federal Reserve, the European Central Bank, which have been printing unlimited money since 2008, is now joined by the Japanese central bank. India has received 25,519 crore in portfolio flows in January this year, against 26,915 crore a year before.

Raising of the debt investment ceiling for foreigners to $75 billion from $65 billion has also helped. But it is also a worry. A lot of this is hot money and could reverse at a short notice, jolting the currency market. "Much of the recent FII investment under the G-sec limits has flown into short-term T-bills, enhancing refinancing risks to external debt," RBI's economic review said. "Concerns about the sustainability of India's external sector have increased."

When all is not well, the governor went ahead with the lowering of interest rates that could manifest in a higher demand, and in fact worsen the external sector imbalance. None other than a top RBI executive admits to that.

"In a slowing economic growth, a high trade deficit is a matter of concern, and (will) show some imbalance," says Deepak Mohanty, executive director at RBI. "So partly, it could be that a lot of domestic production is getting substituted by imports."

The quarter point reduction in interest rate may not lead to a rush by entrepreneurs to put up new projects. But it is aimed at pushing demand. If the demand expectations materialise with economic factors not in place as it happened in 2011 when a premature pause in interest rate increase had to be reversed, the central bank's reaction may not be different this time either.

Five years of economic mismanagement has complicated policy decisions. It is no more a straight case of inflation and interest rates. As we saw the governor latch on to the government, bringing down fiscal deficit to ease rates, it may now be time to see improvements in the current account deficit number. "We will take into account what the current account deficit is. It will not be driven just by the inflation number or the inflation trajectory," Subbarao said on his monetary policy stance. "The current account deficit has implications for inflation and, therefore, for the conduct of monetary policy."

This concern eliminates the possibility of lowering interest rates in the near future. Economists penciling in a 100-150 bps cut in interest rates are now forecasting half that.

Just as the 6-7% economic growth rate looks to be the new norm, so may be the interest rates for some years to come. These may be the new normal.

Finance ministry hopeful of 5.5% GDP; says CSO may have missed upturn

NEW DELHI: GDP growth for the current fiscal could be higher than that forecast by the Central Statistical Office (CSO), the finance ministry has argued, citing improvement in forward-looking indicators and the tendency to underestimate growth when the economy is on the mend.

Advance estimates of GDP released by CSO on Thursday forecast only a 5% growth in the current fiscal, the lowest since 2002-03.

Citing GDP numbers for two earlier years when the final outcome was much better than the advance estimates, the ministry said it is likely that final growth in 2012-13 will be closer to 5.5% or more, an assessment also shared by some private economists.

Earlier in the day, Chief Economic Advisor Raghuram Rajan also said the CSO estimate could be on the lower side. "At turning points in GDP growth, looking at past data underestimates the change... When you are trending down, you tend to underestimate and when you are trending up, you tend to overestimate," he said at a symposium organised by Citi-MIT Sloan.

Economists also felt the final growth could be higher. "There could be a marginal upward revision to final FY13 GDP growth, on account of construction activity. The final numbers would be somewhere around 5.4%," said Shubhada Rao, chief economist, YES BankBSE 0.12 %.

DK Joshi, chief economist at CrisilBSE -0.44 %, said, "We expect the final numbers to be at around 5.5%."

In 2009-10, in its advance estimates, the CSO had pegged growth at 7.2%, which was eventually revised upwards to 8.6%, the finance ministry said in a statement. Similarly, in 2010-11, the final 9.3% growth was well above the 8.6% estimated initially.

In contrast, when the economy was slowing down in 2008-09 because of the global financial crisis, the final growth rate of 6.8% was below the 7.1% indicated in advance estimates. The ministry argued that the advance estimates are based on data till November-December, and may have missed the upturn that the statement asserts is underway. "(This) makes its estimates accurate when GDP growth is following a trend, but not when it is turning," the statement said.

CSO releases three estimates of GDP before unveiling the final numbers. The first estimate, also called advance estimate, is made public in the first week of February of the relevant year. Subsequently, revised estimates are released at the end of May (in the nest fiscal) and are followed by quick estimates by January-end. The final numbers come in later.

The ministry pointed out that the Purchasing Manager's Index (manufacturing) has been moving up since October 2012 and seasonally adjusted IIP growth has stabilised since October 2012.

The annual growth in excise duty and service tax in April-December 2012 was 16% and 33%, respectively. The ministry added that the Reserve Bank of India's decision to cut policy rates by 25 basis points following a moderation in core inflation will also stimulate growth.

"The government's objective is to create conditions conducive to growth such as macroeconomic stability, and a number of steps had been taken in that direction," Rajan said, highlighting the setting up of the Cabinet Committee on Investments and nod to debt restructuring of state electricity boards. However, he admitted that more needed to be done and that the economy was growing well below potential.

ECB's Visco says markets watching Italy closely

ROME: Financial markets remain keenly focused on Italy's ability to control its public finances and pursue reforms to lift its stagnant economy, European Central Bank governing council member Ignazio Visco said on Saturday.

"Italy must not lower its guard," Visco, the governor of the Bank of Italy, said according to the text of a speech at a conference in Bergamo.

"The attention of international investors continues to focus, rightly, on our capacity to preserve balance in public finances and to pursue with determination, an increase in our development potential," he said.

He said periodic bouts of market tension, which have been seen over the past few weeks as elections on Feb 24-25 approach, underlined the fragility of the situation facing Italy, which is stuck in deep recession with a public debt burden second only to Greece in the euro zone.

Free trade pact with India will need more negotiations: EU

BRUSSELS: The European Union has indicated that more negotiations will be needed to sort out the remaining issues before a free trade agreement (FTA) with India can be signed.

The EU leaders, who held a special summit in Brussels, underlined the importance of building up bilateral trade relations with key emerging economies such as India, which could be "very beneficial for promoting growth and employment".

However, the EU's on-going negotiations with India on FTA will "require further efforts", they said in a joint statement issued at the conclusion of their two-day summit on Friday.

The leaders said that while the EU remained committed to further development of the multilateral trading system, its immediate focus is on developing bilateral trade relations.

"This can and must make a positive contribution to the multilateral system," they said.

"By building on the World Trade Organisation (WTO) rules and by going further and faster in promoting openness, the EU's bilateral agreements will help to clear the way for further progress at the multilateral level," the statement said.

The heads of state and government of the EU suggested that all efforts should be made to pursue agreements with key partners, building on the tangible progress made in recent months in the EU's bilateral trade agenda.

They also stressed the need for "prioritising" those negotiations that will provide most benefit in terms of growth and jobs.

The European Council looks forward to the report of the EU-US high level working group on jobs and growth and its recommendations.

The EU leaders called upon the European Commission and the European Council to follow up on these recommendations without delay during the current presidency, they said.

The EU leaders reaffirmed support for a comprehensive trade agreement which should pay particular attention to ways to achieve greater trans-Atlantic regulatory convergence.

They also noted that the EU's agenda with China is "broad and ambitious". Priorities in the short term should focus on investment, market access, procurement and intellectual property rights and should be based on a constructive and strategic engagement.

They stressed the need for further deepening the trade relations with the ASEAN countries in addition to the conclusion of the negotiations with Singapore.

They reaffirmed commitment to a successful conclusion of the negotiations within WTO's Doha Development Agenda (DDA). This required efforts from all participants in the negotiations, in particular from large emerging economies.

In the short term, it is important for progress to be made towards a multilateral agreement on trade facilitation as well as on other aspects of the DDA, by the time of the 2013 WTO ministerial conference in Bali.

MUMBAI: Not happy with CSO's growth projection, Finance MinisterP Chidambaram today said there are signs of upturn in the economy and it is likely to grow at a higher rate of 5.5 per cent this fiscal and further improve to 6-7 per cent in 2013-14.

"While 5 per cent growth rate of CSO is low and is a matter of concern...we believe growth will be closer to 5.5 per cent rather than CSO's estimate of 5 per cent", he said while launching the Rajiv Gandhi Equity Savings Scheme (RGESS) here.

The Minister further said that Central Statistical Organisation's (CSO) estimate of 5 per cent was not the lowest of the decade.

"It is still higher than the two record lows of 2000-01 and 2002-03. There are signs of upturn and that will take us back to high growth path," Chidambaram said.

The Minister further said: "Why should we, without any reason, denigrate our own performance and record?

"I have no doubt in my mind that we will come out of trough and we will climb back to growth rate of between 6-7 per cent next year and then between 7 and 8 per cent in the year after."

CSO's advance growth estimate of 5 per cent for the current fiscal has evoked sharp reaction from Finance Ministry which said that it has based the projection on data available till November, and ignored the signs of uptrend.

Budget 2013 less important, most growth-triggers independent of it

India seems headed for another phase of low growth. But the finance minister has few levers to work with in the Budget and, in any case, most of the big-growth triggers lie outside the proposals he will make on February 28.

Amidst the economic slowdown in early 2009, a handful of Indian ministers and officers kept their fingers crossed for what could be a memorable moment. They hoped India could possibly pip export-dependent China in the growth race during the last quarter of fiscal year 2009.

Ajay Shankar, then Union industry secretary, was just back from attending the World Economic Forum's annual meet in Davos where one of the issues being discussed was India's GDP growth coming close to that of China's. China's GDP growth rate for the October-December quarter had dropped to 6.8%, which was far below expectations for a nation that enjoyed double-digit growth. The feeling was that the Chinese numbers would go down further, which made the Indian establishment work harder to register at least a 6.5% growth, thus making India the fastest growing nation among large economies. Of course, that didn't happen.

Now Shankar is retired, but he still has an advisory role in the government as member secretary of the National Manufacturing Competitiveness Council (NMCC), a government-sponsored think tank.

After interacting with leading CEOs of India Inc recently, this is what Shankar has to say: "The focus should not be on monthly numbers but on measures like fast-tracking of environment clearances, commencement of power projects and new investments in railways. The recovery needs to be so robust that we are back at 8 to 9% GDP growth quickly."

There are expectations that both the Union and Rail Budgets may have some dramatic announcements to boost investments. But finance minister P Chidambaram faces the unenviable task of handling a number of problems at the same time.

The government's finances are stretched, the current account deficit is high, and inflation, despite softening somewhat, is hardly in comfort territory. The story is only slightly better when it comes to private sector balance sheets. Key infrastructure players are heavily leveraged, and banks are tightening the screws on loan growth to make up for the years of liberal lending. The bottom line: the finance minister has little room for manoeuvre.

IN A BIND

To put those macro numbers in context, it helps to compare the current period of weak growth with earlier ones in the last couple of decades. There was the crisis period of 1991, the slump in growth following the Asian crisis in 1997, the crash following the dotcom bust, and the global credit crisis of 2008-09. In each of these cases, with the notable exception of 1991, there was a silver lining or two with respect to India's macro-economy.

During the longest and most prolonged slump in this 20-year period, for instance, which lasted from about 2000 to 2003, inflation rates rarely crept above 7%, and that too in only one year (fiscal year 2001). The Reserve Bank of India's (RBI's) reaction to the Asian crisis had been to hike interest rates sharply to ward off the crisis and keep the rupee from sinking rapidly the way other major emerging market currencies had. This tactic worked, though it inevitably hit industry hard. But right through this period, the current account deficit hovered at around 1% of GDP.

As Abheek Barua, chief economist at HDFC BankBSE -0.01 %, points out, this was a period of major structural change for Indian industry. "Tariffs and other barriers to trade were coming down, and Indian industry was forced to be more efficient. The slowdown was a result of the system adjusting itself to major policy changes."Going into the 2008 global credit crisis, the key silver lining was the government's own fiscal stance - the fiscal deficit was at a multi-year low of 2.5% of GDP in 2007-08. When the crisis hit, the government had more than enough room to respond by aggressively cutting taxes, and expanding spending to keep the

economy on an even keel. It was a period in which private sector sentiments were at their worst, and foreign investments had slowed to a trickle.

But stare into 2013, and it becomes hard to figure out exactly what the silver linings are, if any. Inflation has softened in recent weeks, and the market continues to hope that RBI governor D Subbarao is happy enough with the trend to start cutting rates. However, just two days before the latest announcement that wholesale inflation had dropped to below 7% , came the news that consumer price inflation had actually climbed to over 10%.

Free trade pact with India will need more negotiations: EU

BRUSSELS: European Union leaders have reached a deal on 960-billion euro (USD 1.3 trillion) budget for the next seven years, averting a stand-off over 27-nation bloc's future spending.

The agreement hammered out after two days of tough negotiations at a special summit here is a compromise between northern European countries, including Britain and Germany, who pressed for a sharp reduction in the EU spending from 2014-20, and those fiercely opposed to any cuts.

The heads of state and governments of the 27-nation bloc agreed to reduce EU long-term budget by around 3.3 per cent, from the current 2007-2013 budget for the first time.

They also agreed to cap actual spending at 908.4 billion euros and to reduce the spending on agriculture and regional development, which traditionally receive the largest share of funds from the EU.

European CouncilPresidentHerman Van Rompuy hailed the agreement on the next budget and said it will be a balanced and growth-oriented budget that is realistic and driven by pressing concerns.

"It was not an easy task; this was our single longest meeting so far in my mandate, but it was worth working for this result," he said in a statement. "The compromise shows a sense of collective responsibility from Europe's leaders."

The dispute over the next budget had threatened to cause a new split in the EU and to reignite the debt crisis, after the last budget summit in November broke down.

The opening of the summit on Thursday was delayed by around six hours as the EU leaders struggled in smaller groups to narrow down their differences and the breakthrough came after an all-night session.

The European Commission had originally proposed a budget of 1,09 billion euros for the next 7 years, a 5 per cent increase over the current level, but that was scaled down to 973 billion euros at the last summit under pressure from north European countries, which contribute more to the EU than they receive.

They insisted that the EU spending must be reduced to match the spending cuts in the national budgets of several member nations.

British Prime Minister David Cameron, who took the centre-stage of the budget dispute by demanding drastic reduction in the next seven-year spending, presented the deal as his victory.

He said he wanted to set a budget limit "that would deliver a cut in actual spending over the next seven years and that has been achieved".

He had hoped to slash the budget to 885 billion euros and insisted ahead of the summit that he would not sign up unless further cuts were made.

Under the EU rules, a decision on the budget must be unanimous.

The British people can be happy that "we cut the European 7-year credit card limit for the first time ever", Cameron told a news conference.

As a result, the EU budget would cost Britain less than 1 per cent of Europe's national income, he said.

The next budget will also reduce the EU spending to finance its Common Agricultural Policy and will "enable the union to do things it should in a way it can afford", Cameron said.

"It will promote growth, encourage research and development and will help the newest members to make for the decades which they lost under the communism," he added.

He said he also successfully fought off attempts to undermine the rebate which Britain receives from the EU and ensured that "the rebate is safe".

French President Francois Hollande spoke of a "good compromise", even though the budget cap agreed was lower than 913 billion euros he wanted.

French demands have been met to a large extent. "We can say that we have achieved our goals," he told a news conference.

Above all, France could safeguard its EU subsidies in the agricultural sector, he said.

France is one of the main beneficiaries of the common agricultural policy.

German chancellor Angela Merkel welcomed the agreement as "good and important".

It provides clarity for the planning and execution of various important projects, she said, adding it is also an expression of solidarity among the EU member-nations.

Out of the 960 billion euro budget framework agreed, 373.5 billion euros is earmarked for the agriculture sector, 47 billion euros less than in the current budget.

The second largest share of the budget amounting to 324.7 billion euros will be given to finance the structural funds.

Allocations to finance investments in the areas of fostering growth, competitiveness and employment will be raised from 34 billion euros to 125.7 billion euros.

A total of 61.6 billion euros has been earmarked for financing the EU administration while 58.8 billion euros will be given to support the union's development aid programmes and its foreign policy projects

Turkey to clear IMF debt by May: Tayyip ErdoganISTANBUL: Turkey is set to make a "clean break" with the International Monetary Fund by paying off its remaining debt by May, Prime Minister Recep Tayyip Erdogan said on Saturday.

"We have been paying and paying... Right now the debt stands at $860 million (643 million euros)," Erdogan said in televised remarks.

"When we pay the last slice in May, we will zero out the debt and make a clean break," he added.

Erdogan said his Islamic-rooted Justice and Development Party (AKP) government, which took over a $23.5 billion IMF debt when it came to power in 2002, was in talks to loan five billion dollars to the the global institution.

The pay-off would mean a "new era" for Turkey where taxes can be put toward expanding national infrastructure once the debt is cleared, Finance MinisterMehmet Simsek was quoted as saying by Anatolia news agency.

"We have somehow maintained a debt deal (with the IMF) since 1958," he said. "Turkey is now entering a new era by not signing into any programs and clearing its debt completely...Turkey will be climbing up the ladder in a sense."

Over the decades, Turkish governments have signed 19 stand-by agreements with the fund for over $50 billion to meet financial challenges.

In 2008, Ankara managed to complete its last stand-by with the IMF, signed in 2005, and refused its aid in 2010, following two years of negotiation with the Washington-based institution.

During that period, the Turkish economy staged a spectacular recovery despite the global financial crisis, growing by 8.9 percent in 2010 and by 8.5 percent in 2011.

Its growth has however slowed down significantly since late 2011, with government forecasting a growth of five percent each for 2014 and 2015 amid its plans for a "soft landing

EU leaders agree to $1.3 trillion budget

BRUSSELS: European Union leaders have reached a deal on 960-billion euro (USD 1.3 trillion) budget for the next seven years, averting a stand-off over 27-nation bloc's future spending.

The agreement hammered out after two days of tough negotiations at a special summit here is a compromise between northern European countries, including Britain and Germany, who pressed for a sharp reduction in the EU spending from 2014-20, and those fiercely opposed to any cuts.

The heads of state and governments of the 27-nation bloc agreed to reduce EU long-term budget by around 3.3 per cent, from the current 2007-2013 budget for the first time.

They also agreed to cap actual spending at 908.4 billion euros and to reduce the spending on agriculture and regional development, which traditionally receive the largest share of funds from the EU.

European CouncilPresidentHerman Van Rompuy hailed the agreement on the next budget and said it will be a balanced and growth-oriented budget that is realistic and driven by pressing concerns.

"It was not an easy task; this was our single longest meeting so far in my mandate, but it was worth working for this result," he said in a statement. "The compromise shows a sense of collective responsibility from Europe's leaders."

The dispute over the next budget had threatened to cause a new split in the EU and to reignite the debt crisis, after the last budget summit in November broke down.

The opening of the summit on Thursday was delayed by around six hours as the EU leaders struggled in smaller groups to narrow down their differences and the breakthrough came after an all-night session.

The European Commission had originally proposed a budget of 1,09 billion euros for the next 7 years, a 5 per cent increase over the current level, but that was scaled down to 973 billion euros at the last summit under pressure from north European countries, which contribute more to the EU than they receive.

They insisted that the EU spending must be reduced to match the spending cuts in the national budgets of several member nations.

British Prime Minister David Cameron, who took the centre-stage of the budget dispute by demanding drastic reduction in the next seven-year spending, presented the deal as his victory.

He said he wanted to set a budget limit "that would deliver a cut in actual spending over the next seven years and that has been achieved".

He had hoped to slash the budget to 885 billion euros and insisted ahead of the summit that he would not sign up unless further cuts were made.

Under the EU rules, a decision on the budget must be unanimous.

The British people can be happy that "we cut the European 7-year credit card limit for the first time ever", Cameron told a news conference.

As a result, the EU budget would cost Britain less than 1 per cent of Europe's national income, he said.

The next budget will also reduce the EU spending to finance its Common Agricultural Policy and will "enable the union to do things it should in a way it can afford", Cameron said.

"It will promote growth, encourage research and development and will help the newest members to make for the decades which they lost under the communism," he added.

He said he also successfully fought off attempts to undermine the rebate which Britain receives from the EU and ensured that "the rebate is safe".

French President Francois Hollande spoke of a "good compromise", even though the budget cap agreed was lower than 913 billion euros he wanted.

French demands have been met to a large extent. "We can say that we have achieved our goals," he told a news conference.

Above all, France could safeguard its EU subsidies in the agricultural sector, he said.

France is one of the main beneficiaries of the common agricultural policy.

German chancellor Angela Merkel welcomed the agreement as "good and important".

It provides clarity for the planning and execution of various important projects, she said, adding it is also an expression of solidarity among the EU member-nations.

Out of the 960 billion euro budget framework agreed, 373.5 billion euros is earmarked for the agriculture sector, 47 billion euros less than in the current budget.

The second largest share of the budget amounting to 324.7 billion euros will be given to finance the structural funds.

Allocations to finance investments in the areas of fostering growth, competitiveness and employment will be raised from 34 billion euros to 125.7 billion euros.

A total of 61.6 billion euros has been earmarked for financing the EU administration while 58.8 billion euros will be given to support the union's development aid programmes and its foreign policy projects

Gold demand will fall once retail inflation declines

The recommendations of the expert group set up by the Reserve Bank of India on moderating gold demand, even if accepted, are unlikely to discourage demand. The demand for gold is only the outward manifestation of loss of faith in financial instruments on account of high inflation.

Steps to curb the growth of gold-loan BFCs, reduce their access to bank finance, introduce differential pricing of banking services and finance for gold import, set up a gold bank, dematerialise gold, recycling domestic scrap gold, etc, all of which have been suggested by the group, could help. But given the imperatives of why people are turning to gold, these are more likely to drive demand underground. With all its resultant ills!

The study was driven by two macroeconomic concerns. One, the impact of large gold imports on external sector stability and, two, the impact on domestic financial stability due to the linkages between gold loan NBFCs and banks. Of the two, it is the former that has become a major source of concern.

The country's current account deficit for the second quarter was 5.4% of GDP, well over the danger mark of 2.5%. With the RBI flagging the possibility of it rising further in the third quarter and exports showing no signs of improvement, we need to move fast to rein in the current account deficit.

Now, the current account deficit is nothing but a reflection of the savings-investment gap. So, the only long solution is to rein in the fiscal deficit. That will take time. Right now, therefore, we have to contain imports (read: contain gold imports since the other major import, oil, cannot be reined in easily given the economy's dependence on imported oil).

Unfortunately, past efforts to reduce imports, including a six-fold increase in the import duty on gold, have not made a difference. Likewise, the expert group's recommendations are unlikely to significantly curtail demand. Not until we have some success in reducing retail inflation.

High interest rates coming in way of equity culture: Experts

NEW DELHI: A high interest rate scenario wherein people can get almost 10 per cent returns on low-risk products like fixed deposits is coming in way of a diverse equity culture getting developed in the country, experts say.

"One of the reasons for equity culture not developing to desired levels is the high interest rate scenario in the country. A high interest rate environment makes people relatively relaxed and complacent, when it comes to making investments," global banking giant Citigroup's Head of Markets ( South Asia) Pankaj Vaish told PTI.

"For most households, it is attractive to park the money in a bank account and other deposits for almost 10 per cent returns with virtually zero risk, as against risking their money with equity even if the returns could be higher," he said.

Vaish, who was here for an event organised by Citi in partnership with Cambridge-based renowned business school MIT Sloan School of Management, said it will take some time and investor education for the people to get comfortable with the equity culture.

"It is a competitive marketplace, when you see the equity market pitched against corporate bonds providing interest at around 10 per cent, by some of the big names in the public and private sectors.

"Our culture is such that people are more comfortable ensuring the security for their investments, rather than merely looking for high returns. Hopefully the next generation would have the appetite to take greater calculated risks," Vaish added.

Asked about India's growth potential on the global stage, Vaish said that there was a time when people here were satisfied with a three per cent growth rate, but the times have changed and the aspirations are high today.

"This is something we need to be cognizant and careful about in a democracy. At times we blame the slowness in the economy on our democracy, but it is the democratic systems and institutions which ensure that the aspirations of our citizens are met.

"If the aspirations are not fulfilled and we do not provide the opportunities to our youth, then not only is it an unused asset but the accumulated unfilled aspirations can be a huge debt that we will have to service," he said.

Asked about the issues before Indian economy, MIT Sloan School of Management's Deputy Dean S P Kothari said leaders of the country need to introspect why India is given low rankings on various economic parameters by the agencies like the World Bank and UN.

"We should understand that they are not conspiring against India and if you see there is actually a good amount of goodwill out there for India. There is a lot that is going on in favour of India, but at the same time we need to understand that we need to change. We have to change quite dramatically," Kothari said.

Asked whether the delays caused by democratic processes are coming in way of India's growth on global stage, Kothari said that many countries have got democracies but they do not necessarily come in the way of conducting business.

"For example the stalemate in the US Congress is not allowed to hurt the US economy... India needs to show what are the measures that would convince the world that the problems are no longer there," he said.

Kothari said that if India manages to take its FDI inflows to the level of $250 billion a year, it would roughly translate into an improvement in the GDP growth rate by about 2-3 per cent."Therefore if we want 9-10 per cent growth rate, this $250 billion FDI would get us there," he said.

Asked about the steps that are required to achieve these goals, Kothari said: "It is not a continuity and consistency in the framework that would be required for these numbers, but a lot of improvement from the current policies would be needed to achieve these targets.

"We would need to experiment a lot more. The law enforcement is a major issue. Businesses need an effective law enforcement mechanism, be it for their labour dispute, patent dispute or any other issues, they want speedy resolutions.

"Especially, when it comes to international operations, no one wants to take risk and when they go for arbitration, they either go to Singapore or London. This is despite India being a nation full of lawyers and the country also doing lots of back-office legal work for the rest of the world," he said.

Economy showing signs of upturn: P Chidambaram

MUMBAI: Finance minister P Chidambaram on Saturday said the upturn in the economy has started with indications of green shoots in the second half of this fiscal. He said more measures in the next few weeks and the next fiscal could help propel the country back to the 8% growth path.

Chidambaram's remarks came a day after his ministry disputed the GDP growth figures forecast by the Central Statistical Office, which in its advance estimates had forecast that India's national income would grow only 5 % in FY 13 — the lowest since 2002-03. "Going forward, I am confident that the economy will return to a growth rate of close to 5.5 %, which is satisfactory but does not make me happy," he said. "We believe that the upturn has begun, it is a very low curve, its not a V-shaped upturn, it is perhaps a very long and shallow U," Chidambaram told an audience of financial sector chiefs and executives.

India needs to grow at over 8% to absorb the new people who will enter the job market and therefore it was imperative to ensure that the economy is humming again. Chidambaram who has been credited with improving sentiment in the last couple of months after returning to the finance ministry in mid-2012 with executive action and policy measures said that the measures taken in the last few months and those planned for the near term and next fiscal could put India back on the 8 % growth path. Between 2004 and 2008, the Indian economy grew annually at over 8.5% on an average before the global financial crisis coupled with policy inertia and a series of scams dragged down growth.

Ministry streamlines system to avoid errors in export data

NEW DELHI: Errors in reporting of export data could be a thing of past, with the Commerce Ministry streamlining the system to ensure smooth and correct flow of shipment figures from different ports in the country.

"The ministry has fixed all the problems and has also reduced the time lag in releasing export numbers. For example, time lag for principal commodity exports has been reduced by a month since October 2012 from 3-4 months earlier," an official told PTI.

This follows a series of steps taken by the Department of Commerce to ensure timely reporting and collating of export data by different agencies, including Directorate General of Commercial Intelligence and Statistics (DGCI&S) and the RBI.

The review exercise was started by the then Commerce Secretary Rahul Khullar after an error of USD 9 billion was noticed in 2011 in the country's exports for April-November period of 2011-12.

The exercise was completed by current Commerce Secretary S R Rao.

The error happened due to several reasons, including mis-classifications, double counting and problems in the computer software.

The Prime Minister's Office had also asked the commerce department to explain the errors.

The issue was discussed in detail on January 29 during the meeting between Cabinet Secretary Ajit Kumar Seth, Commerce Secretary S R Rao and Revenue Secretary Sumit Bose.

The Commerce Ministry gave a detailed presentation to the Cabinet Secretary and has apprised him of the work. The ministry has also started issuing press statements in advance by almost three weeks since November 2012, the official said.

"Prompt and error free data from customs to DGCI&S is a pre-requisite for expeditious dispersal of trade data," Director General of Foreign Trade (DGFT) Anup Pujari said.

Lax in data reporting has also created problems for officials during the visit of Commerce and Industry Minister Anand Sharma to Mauritius last month where bilateral trade figures were found not matching.

According to a source, one of the main reasons for discrepancy in the bilateral trade figures was lack of computerisation at minor ports.

Out of about 300 ports, 180 ports are still non-EDI (electronic data interchange).

"Collation of manual figures takes time and in that chances of error is also there but soon things will be fixed," the source said.

Currency wars back on international agenda

PARIS: The strength of the euro, the state of the global monetary system and controversy over a so-called "currency war" will dominate the economic stage at eurozone and G20 ministerial meetings this week.

The currency issue has been revived by Japan and is beginning to cause concern in some quarters in Europe.

France will raise the issue of the strengthening euro at a meeting of eurozone finance ministers on Monday. Then a meeting of G20 ministers is likely to focus on the big picture in Moscow on Friday and Saturday.

Eurozone finance ministers, meeting as the Eurogroup in Brussels on Monday, hold their first session under their new president Jeroen Dijsselbloem of the Netherlands, against a background of calmer conditions for their debt crisis.

Dijsselbloem has taken over from Jean-Claude Juncker of Luxembourg who chaired the meetings throughout the global financial crisis and then the eurozone debt turmoil.

This meeting is not expected to take any decisions either on help to debt-stricken Cyprus in the run-up to next week's presidential election there; or on the creation of a banking union, still the subject of intense negotiations.

The main focus of discussion is likely to be the rise of the euro: French Finance Minister Pierre Moscovici called last week for a debate on the euro's exchange rate.

France is worried that the strengthening euro makes eurozone exports look more expensive and could undermine government efforts to improve the competitive position of French industry and services. The Socialist administration is already grappling with weak growth and a big trade deficit.

France wants the eurozone to arm itself with a policy for the foreign exchange rate. The external value of the euro should not be left to market forces of the

moment, French President Francois Hollande has argued.

Germany and the European Central Bank however, are keen to nip the debate in the bud, arguing that the European currency is not over-valued.