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August - September 2008

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Business news

Tata Communication goes for Neotel, South Africa

New Delhi: Tata Communication is all set to acquire a majority stake in South African network operator Neotel, in which, currently it holds about 26 per cent stake. The company has entered into an agreement with two South African Companies ­­Eskom and Transnet ­­to acquire their 30 per cent stake in Neotel, the second telecom network operator in the Southern African nation.

After the completion of the acquisition Tata Communication along with Tata Africa would have an effective 56 per cent stake in Neotel.

The value of the acquisition was not disclosed by Tatas.

The shareholders of Neotel are Nexus, Communitel and two telecom consortium, the company statement said.

The agreement is subject to fulfilment of certain conditions, some of which have a period of upto six months to be fulfilled.

Manufacturing downturn fuels growth in offshore outsourcing

The manufacturing sector is struggling with a slowdown in global spending as well as rocketing fuel and food prices yet offshore outsourcing is alleviating some of the industry’s woes.

With spending slowing dramatically, companies are bracing for tough economic times and the manufacturing industry looks set to be hit hard.

Hardeep Garewal, President of Strategic Accounts at UK­based Indian outsourcing company ITC Infotech, believes that outsourcing’s biggest growth is yet to come because of the decrease in global spending.

“Offshore outsourcing was once seen as a way to simply manage projects­now it’s becoming the norm and not the exception to reduce costs and boost the bottom line. And even though many companies are experiencing hard times, we are predicting growth in the next 18 months,” he said.

This defiant trend is largely due to many western manufacturers facing increasing pressure from stakeholders to offshore their business in order to cut costs and remain profitable. Yet, many services which aren’t being outsourced to India are still occurring internationally and business process outsourcing in this sector is latent, particularly in product development work.

The change in how manufacturers are doing business in Europe is having a profound effect on outsourcing, however ITC Infotech is still investing and growing in key sectors despite current market conditions.

ITC Infotech is part of the $18 billion ITC Group, India’s third biggest company listed on the SENSEX. ITC is one of just a handful of companies in the world that are carbon positive, which it has achieved through large­scale tree plantations. It is also water positive by increasing water conservation and rainwater harvesting efforts so it produces more water than it consumes. ITC says it is also making strides toward its goal of producing net zero solid waste.

India Watch

The combination of today’s industrial production release, showing output growth slipping to a more than 6­year low of 3.8%, and Wholesale Price Inflation rising to a new 13­year high of 11.9%, is not a particularly happy one, particularly for a government facing a vote of no­confidence later this month. The vote has effectively been triggered by the Left parties’ withdrawal of support for the Congress­led coalition government this week following months of brinkmanship over the proposed US­India nuclear deal.

Against this background it is worth reminding ourselves of India’s Parliamentary arithmetic. The UPA coalition has 226 MPs, leaving them 46 short of a majority. It has apparently now garnered the support of 39 MPs from the Samajwadi Party, although it is not clear that all of them would vote for the government. This then leaves the current coalition seeking the help of several very small parties to win.

Given the growth and, more importantly, the inflationary backdrop, the government is, not surprisingly, hoping to hang on to power until May next year, by which time the General Election must be held. Its hope will be that come early 2009 inflation will be falling again and in our view it won’t be disappointed in that regard. The trouble is, however, we suspect that the headline WPI rate could still be in double­digits or thereabouts. As an exercise to test the ability of previous governments to micro manage the economy we have looked at how GDP growth and WPI inflation have performed in the year of each general election, comparing it with what happened in the previous year. Indeed, growth slowed in eight of the last 15 election years. WPI data only go back to the early 1990s, but on this basis, 3 of the 6 election years saw inflation go up.

Overall, it may well be that the Congress­led government survives the vote of confidence and limps on until 2009. In so doing, however, there will be plenty of demands for populist action as each party, in what is likely to be a very unwieldy coalition, attempts to quickly make its mark before the general election. Meanwhile, history suggests that the government’s ability to control growth and inflation is fairly limited and we suspect that it will go into the election with still high WPI inflation and softening economic activity.

(A report by HSBC)

Uk govt. fiscal rules ­throwing in the towel?

It is reported that the UK government plans to reform the fiscal rules in the autumn, with an announcement likely to be made at the time of the Pre­Budget Report in October.

Ultimately, given that the debt thresholds were already beginning to bind, and the UK economy looks set to deteriorate markedly, breaching these rules appeared inevitable and was largely expected by most commentators. It could even be argued that a reform is entirely appropriate given current circumstances. With demand set to slow but inflation rising, perhaps the appropriate response is to leave the BoE pursuing a relatively tight monetary policy in a bid to combat inflation, whilst the fiscal authorities aim to buoy domestic demand.

The problem the UK has is that economic forecasters have the US case study for comparison. A considerable amount of fiscal loosening has been thrown at the problem in the States and the evidence that it is actually supporting demand on a sustainable basis is not compelling. The US housing market is showing no signs of bottoming and the banking sector problems are ongoing. And it is worth remembering exactly why these rules were established. These were the then Chancellor’s opening line when he first took office in 1997 and were imposed to theoretically guarantee fiscal prudence. Alongside the establishment of these fiscal rules, the BoE was made independent and charged with the inflation target to govern its own commitment to prudence. The aim of imposing such rigid structures was to guarantee an end to the 'boom­bust' cycle which in turn was aimed at encouraging investment. Tinkering with these rules when times get tough clearly removes all credibility on such a commitment. This could be incredibly damaging for the perceptions of the structural soundness of the UK, which has already taken a knock over the past year. For this reason, our FX strategist have issued a sell Cable recommendation.

We argued in Labour Pains (30 May) that it looked likely that the Government would have to borrow £30bn more than anticipated over the coming three years. The risks to that estimate look increasingly to the upside.

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