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INDIA-E  June 2002

INDIA-E June 2002

Subject:

India Network Economic News - June 4, 2002

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Tue, 4 Jun 2002 10:40:34 -0400

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India Network Economic News - June 4, 2002 Volume 14 Issue 106
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Today's News Items
------------------
#1. War fears will drive IT business to China
#2. Power Ministry plans to raise $1 b from private sector
#3. Receding war clouds help Sensex
#4. Rupee hovers around record lows against $
#5. The economic cost of war
------------------------------------

#1. War fears will drive IT business to China

Hyderabad, June 3: Vivek Paul, vice-chairman of Indian software major, is
also president of Wipro Technologies, the companys global software
services provider. Based in California in the United States, Paul  who
joined the firm in 1999 from GE, where he ran the $700 million Global CT
(computerised tomography) scanner business  heads Wipro Technologies
business in 27 locations around the world.

Paul is an engineer by training, earning his degree from BITS Pilani. He
earned his masters degree in business management from the University of
Massuchusetts at Amherst.

Wipro Technologies is stated to be the first company in the world to be
certified at Level 5 of version 1.1 of CMMi. Paul spoke to Business
Chronicle from his office in California on Monday.

Excerpts from the interview:

What will be the impact of the current tensions between India and
Pakistan?

Everybody is tense about the situation on the Indo-Pak border. I dont
expect any impact on the business, both for Wipro and others, in the
short-term. But if the war clouds continue to linger, the software
services business will be affected.

We must also factor in the travel advisory issued by the US State
Department advising US nationals not to travel to India, or if they are
already there, to leave the country. The advisory has an impact in that US
companies will be reluctant to send their employees to India because if
they come to harm, the companies can be sued for billions of dollars.

But has business, the signing of new contracts, especially from US
companies, been affected?

So far, no. We have sales cycles that are long-term. One fallout of the
uncertainty in India is that US companies are looking to outsource their
IT work to China and Indonesia. But I believe that once the threat of war
goes away, the business will come to Indian firms.

How has Wipro Technologies been faring in the current circumstances?

As I said, the effect will be minimal, if at all, in the near-term, but if
the war clouds linger, there could be some serious impact.

With reports that the US economy is looking up, is Wipro Technologies in
hiring mode?

Firstly, we have managed to take 1,000 software writers off the bench and
into the billing cycle in the past few months. We are also hiring
experienced software writers and managers. And, finally, we announced a
pay-hike of between 10 and 30 per cent for all our staff on June 1.

More importantly, we have invested in online training programmes for our
staff, put in place feedback systems to finetune the programme. Things are
looking up, but the growth seen in 2000 is a thing of the past. We expect
to see a sustainable growth.

#2. Power Ministry plans to raise $1 b from private sector

Guwahati, June 3: The Union Power Ministry has mooted India Power Fund to
raise $1 billion from the private sector as well as financial institutions
for reforms in the power sector.

Union Power Minister Suresh Prabhu said here this morning that the fund
would be raised for generation of more power as well as ensuring quality
of the same.

Prabhu is here in connection with the foundation stone laying of the
Doyang Power Project of Arunachal Pradesh. He also met top officials of
various public sector units under the power ministry to review the power
scenario in the North East.

The proposed India Power Fund will be in the line of the Resurgent India
Bonds and India Millenium Deposits, both of which were successful and
popular with the non-resident Indians.

This is being done to get the private sector involved with the power
reforms of the country, the Minister said. Prabhu himself is pushing ahead
with the proposal with the complete backing of the Power Finance
Corporation while trying to get major financial institutions involved with
the project.

The PFC and the Union government are expected to contribute the seed money
while the other banks and financial institutions would be asked to
contribute to the corpus, said the Minister.

The actual proposal for the India Power Fund of $1 million was mooted by
the Power Finance Corp early this year to mobilise resources for
transmission and generation.

Already the financial institutions like the Industrial Development Bank of
India, IFCI, ICICI, State Bank of India, Bank of Baroda and Bank of India
have been approached.

The Minister informed that he had already formed a committee of experts to
identify the sources of funding, including government funding,
multi-lateral and bi-lateral assistance, institutional financing, market
borrowings, internal resoures and private investment. The PFC mooted the
idea because of huge power generation problem.

#3. Receding war clouds help Sensex

Mumbai: Led by Tata Steel, old economy stocks made a strong turnaround
scoring handsome gains and aided the Sensex to finish higher by 35 points
on the BSE on Monday on revival of buying support from speculators as well
as retail investors. The Sensex opened sharply up at 3162.27 and later
rose to the intra-day high of 3185.57 before ending at 3161.09 as against
last Fridays close of 3125.73, gaining 35.36 points.

#4. Rupee hovers around record lows against $
PTI [ TUESDAY, JUNE 04, 2002  12:24:13 PM ]

MUMBAI: The rupee hovered around record lows against the US currency early
on Tuesday, driven down by steady dollar demand from banks amidst receding
supplies owing to the ongoing uncertainties on the subcontinent. In
moderately active but nervous trade at the Interbank Foreign Exchange
market here this morning, the rupee slipped to a life-time lows of Rs
49.05/06 struck on May 23. The rupee opened cautiously weak at Rs 49.04/05
per dollar.

Persistent dollar demand from banks in the face of dwindling dollar
supplies from foreign funds inflows continued to weigh heavily on the
rupee owing to the prevailing uncertainties on the borders, dealers said.
In cross currency trades, the Euro was quoted at Rs 46.19/21, Pound
Sterling at Rs 71.75/77 and Japanese Yen (100) at Rs 39.65/67.

#5. The economic cost of war
By Prem Shankar Jha

One of the most perplexing features of the war fever that has gripped
India and Pakistan is the complete absence, in the endless debate on the
subject during the past five months, of any reference to its economic
cost. It is this omission, more than anything else, that makes one suspect
that the bellicose statements being issued almost daily by both countries
are still essentially play acting, and that neither believes a war is
truly imminent.

The trouble with play acting is that one never knows where it ends and
things get deadly serious. This lack of knowledge tends to make each
belligerent assume the worst of the other. That assumption can push both
over the edge of a war that neither really wants. It is therefore
essential for India and Pakistan to make a coolly rational calculation of
the economic cost of a war. Were they to do so, they would realise soon
that even a conventional war that remains confined to Kashmir would turn
both countries into anarchic failed states in a short period.

The effect of even a minor nuclear exchange cannot even be imagined.
Perhaps the best starting point for assessing the cost of war will be to
compare India's economic health today with what it was in 1971 when it
fought its last major war with Pakistan. In 1971, the finances of the
country were in good health. The gross fiscal deficit of the Central and
state governments was only 3.3 per cent of the GDP. Today, the official
figure is in excess of 10 per cent of the GDP but after uncovering various
subterfuges by which the state governments are hiding their true deficit,
the gross fiscal deficit is close to 12 per cent of the GDP.

In 1973-74, that is, two years after the Bangladesh war, the national debt
amounted to less than 30 per cent of the GDP. In 2001-02 it amounted to 85
per cent. The whole of the Centre's developmental expenditure as well as
Central support to the State Plans had to come from fresh borrowing. This
will push up the national debt and the burden of interest payments
inexorably higher. In sum, were India to fight a war with Pakistan today,
in sharp contrast to 1971, it would have to do so while standing on the
edge of a debt trap.

Pakistan is a good deal worse off than India. In 1971 it went into the
Bangladesh war after two decades of 6 per cent growth, with a low national
debt and, like India, a less than 10 per cent debt servicing burden. That
is why it was able to weather the shock of war, defeat and the loss of
half the country relatively easily. Today, in sharp contrast, its national
debt is 106 per cent of its GDP.

Before September 11, interest payments consumed 71 to 75 per cent of the
Federal governments current revenues and its bare administration costs
consume the balance. As a result virtually the whole of its military
spending, even in peace time, is financed by public borrowing. Pakistan is
not therefore on the edge of, but is already in a debt trap. After Gen.
Musharraf's volte face on the Taliban and Al Qaeda, a massive rescheduling
of foreign debt has brought down the annual servicing cost of foreign debt
by $1 billion, and correspondingly reduced the ratio of debt servicing
costs to current revenues. But it has not been sufficient to pull it out
of the red.

The cost of the war itself will depend on the level to which it escalates.
But no matter how small it remains, it will be high. One yardstick would
be the Kargil war. This tiny conflict, fought in an area where virtually
no armour or heavy weaponry could be used or destroyed, cost India Rs.
5,000 crores. It probably cost Pakistan a good deal more.

A private estimate made in 1990 by the Pakistan army, of the cost of a
full scale conventional war with India was $300 million a day. Today the
figure would probably be above $500 million, and could rise a lot higher
if the two navies went into combat. But even the lower estimate would make
the cost of a three week war more than Rs. 50,000 crores. To this one
would have to add the cost of infrastructure destroyed roads, bridges,
airports, radar and telecommunication facilities, dams, power stations,
oil refineries and offshore oil installations.

All this is assuming the two countries don't turn their bombs on cities.
Overall the destructive potential of each country has increased so
dramatically in the last 30 years that the minimum damage each will do to
the others infrastructure would exceed Rs. 100,000 crores and could easily
be twice as high. India may just about survive such a loss without
breaking up but it is difficult to see how Pakistan would do so. For even
if Pakistan suffers no more damage than India does, its economy is only
one-sixth Indias in size. While Rs. 100,000 crores is less than half of
the Indian central governments budget, it is three times Pakistans tax
revenues in 2000-2001. The task of reconstruction in both countries will
be made still more difficult by the impact that war will have upon the
availability of foreign exchange to finance its import content. If the
Government does not impose exchange controls a dubious expedient at the
best of times  a war will cause most of these reserves to melt away. India
will then face the same problems that Pakistan would face.The first of
these problems will be to ensure a supply of oil. Both Pakistan and India
are heavily dependent on imported oil. If the foreign exchange crunch
disrupts oil supplies road transport, which accounts for four fifths of
total transport in both countries, will come to a halt in days.

Then industry will grind to a halt. Blackmarketing, inflation and massive
layoffs or bankruptcies will follow. But even if the two countries survive
the immediate problems that war and its aftermath wiill pose, there is one
thing they will never be able to recapture. That is time. A full scale
conventional war , even if it lasts for only two weeks will put the two
countries back by five to ten years. Pakistan added eight lakh to its
unemployed between 1998 and 2000 and India has been adding seven lakh
persons to its educated unemployed every year for the past four years. How
many more generations will either country be able to deprive of its future
before peace and social order collapse?

------------------------------------------
End of India Network Economic News Digest
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