Economists See Signs of Stronger Recovery

WASHINGTON — Eighteen months after the recession officially ended, the government’s latest measures to bolster the economy have led many forecasters and policy makers to express new optimism that the recovery will gain substantial momentum in 2011.

Economists in universities and on Wall Street have raised their growth projections for next year. Retail sales, industrial production and factory orders are on the upswing, and new claims for unemployment benefits are trending downward.

Despite persistently high unemployment, consumer confidence is improving. Large corporations are reporting healthy profits, and the Dow Jones industrial average reached a two-year high this week.

The Federal Reserve, which has kept short-term interest rates near zero since the end of 2008, has made clear it is sticking by its controversial decision to try to hold down mortgage and other long-term interest rates by buying government securities.

President Obama’s $858 billion tax-cut compromise with Congressional Republicans is putting more cash in the hands of consumers through a temporary payroll-tax cut and an extension of unemployment insurance for the long-term unemployed.

It is also trying to address one of the biggest impediments to the recovery — the reluctance of companies to invest their piles of cash in new plants and equipment — by granting tax incentives for business investment.

The measured optimism is reminiscent of the mood a year ago, when the economy seemed to be reviving, only to stall again in the spring amid widespread fears caused by the debt crisis in Greece and other European countries.

Even so, economists are increasingly upbeat about the outlook, saying that while the economy in 2011 will not be strong enough to drive unemployment down significantly, it should put the United States on its soundest footing since the financial crisis started an economic tailspin three years ago.

Phillip L. Swagel, who was the Treasury Department’s chief economist during the administration of George W. Bush and teaches at the University of Maryland, said, “The recovery in 2011 will be strong enough for us to see sustained job creation that will finally give Americans a tangible sense of an improving economy.”

A prominent forecaster, Mark Zandi of Moody’s Economy.com, predicted that the economy would be “off and running” next year. “The policy response, in its totality, has been very aggressive,” he said, “and I think ensures that the recovery will evolve into a self-sustaining expansion early in 2011.”

The recession officially ended in June 2009, when the economy started to grow again. Gross domestic product, the broadest measure of the country’s output, grew at an annualized rate of 3.7 percent in the first quarter of this year. But then it stalled, with the rate falling to a mere 1.7 percent in the second quarter and 2.6 percent in the third quarter.

Jan Hatzius, the chief United States economist at Goldman Sachs, said the economy was likely to grow at an annualized rate of around 3 percent this quarter. Goldman projected last week that the growth rate would be 4 percent for most of 2011. Morgan Stanley, which raised its growth forecast for 2011 to 4 percent, is even more optimistic, forecasting a rate of 4.5 percent this quarter.

Administration officials, who have been burned by premature optimism in the past, were reluctant to make predictions for next year. But Austan D. Goolsbee, the chairman of the Council of Economic Advisers since September, said that a shift in sentiment quickly followed the news of the tax deal

“There aren’t many policies which, on the day Washington announces them, lead most private-sector forecasters to publicly and significantly revise their forecasts upward,” he said. “This one did.”

There are significant caveats to the more positive outlook. The housing market remains weak, and another sustained drop in prices could badly undercut the economy. Financial markets and the banking system remain vulnerable to a new round of jitters in Europe over the debt burdens of countries like Ireland and Spain. There is mounting concern about the tattered balance sheets of state and local governments.

While fiscal and monetary policy seems to be helping the economy in the short turn, the tax-cut compromise essentially deferred looming battles over how to cut federal spending and address the government’s huge debt burden.

The Fed’s bond-buying efforts have not prevented long-term interest rates from rising — a phenomenon that is interpreted by optimists as a reaction to higher growth and by pessimists as a demonstration of the ineffectiveness of the central bank’s efforts and the potential for inflation.

And for most of the roughly eight million Americans who have lost their jobs since the recession began in December 2007, it hardly feels like a recovery.

Chairman of Hirco resigns over scandal

Niranjan Hiranandani has resigned as chairman of Hirco, the troubled Aim-quoted Indian property investment company, as he attempts to defend his name amid allegations of irregularities in the handling of employees’ provident funds for other Indian companies.

Mr Hiranandani has also resigned as a director of the company, “pending his name being cleared”.

The company said Mr Hiranandani had resigned following media speculation over inquiries made by the Indian Central Bureau of Investigation (CBI) into his dealings. But it said no formal charges had been laid by the CBI over alleged errors in contributions made to employee funds of companies unrelated to Hirco and noted “Mr Hiranandani’s public rebuttals on the matter”.

Hirco said it had accepted Mr Hiranandani’s resignation as he realised that press coverage of the probe “risks unwarranted damage to the reputation of the company”. It said it offered Mr Hiranandani its continued support.

The resignation is the latest in a wave of troubles to hit the company, set up to invest in landmark residential townships and commercial complexes in India and offer an “unsurpassed living environment” to India’s “large and growing middle class”.

Hirco launched the largest initial public offering on Aim in 2006, raising £383m ($591m) when it made its debut at 500p in December of that year. But its shares collapsed below 100p in 2008 and, in spite of a recovery back above the 200p mark last year, have since fallen back again.

Shares in the company, which have fallen 55 per cent over the past year, edged up ¾p at 71p on Thursday.

In August, Hirco disappointed shareholders by announcing that it expected to pay no dividends before 2013 at the earliest.

In September, following a review of its strategic direction, it also announced a streamlining of the board, which involved Mr Hiranandani’s daughter Priya, Sir Rob Young and Nigel McGowan leaving their posts.

Earlier this month, Hirco reported an annual loss of £13.6m for the year to September 30.

Mr Hiranandani’s resignation from his role as chairman follows attempts by activist investor Laxey Partners to force his departure last year. Laxey failed in an attempt to oust Mr Hiranandani and non-executive directors David Burton and Mr McGowan from the board at an extraordinary meeting in May.

On Thursday, Mr Burton was appointed interim chairman.

Mukherjee Seeks to `Soften Mood' in Political Standoff Over Telecom Probe

India’s Finance Minister Pranab Mukherjee offered to hold a special session of parliament to debate opposition demands for a cross-party probe of the 2008 sale of phone licenses, seeking to end a political standoff before a crucial budget vote early next year.

The Bharatiya Janata Party-led National Democratic Alliance wants a Joint Parliamentary Committee to investigate alleged impropriety after the nation’s chief auditor reported last month that the auction of airwaves may have cost the exchequer $31 billion. The opposition parties organized a rally in New Delhi yesterday to “expose widespread corruption” in Prime Minister Manmohan Singh’s Congress-led government.

“If they assure that there will be a debate, I’m ready to call a special session of parliament before the budget session so that this issue is debated,” Mukherjee said at a function in the capital yesterday.

The nation’s parliament saw 22 consecutive days of gridlock, with only four bills passed of the 36 planned, during its winter session that ended Dec. 13, making it the least productive in at least 25 years. Singh needs to resolve the impasse and seek opposition support for his government’s tax proposals and spending plans to be presented by Mukherjee in the budget session late February, and also to pass pending bills.

Mukherjee’s comments are “an olive leaf to the opposition to allow the budget” to get passed, said N. Bhaskara Rao, chairman of the Centre for Media Studies in New Delhi. “Before the start of the budget session in February, the government wants to soften the mood of the opposition.”

Answer or Quit

BJP leader Arun Jaitley yesterday told supporters that Singh must resign if he can’t answer queries on the phone permits. “The government can’t run in an atmosphere of suspicion.” The party will cooperate only if Singh meets its demands, spokesman Prakash Javadekar, said today.

The biggest crisis of Singh’s second term intensified after the publication of a Nov. 16 report by the Comptroller and Auditor General of India that the award of mobile-phone licenses at below-market prices. The CAG said local units of companies including Telenor ASA and Emirates Telecommunications Corp. suppressed facts and submitted fictitious documents to win permits.

Two days earlier, Telecommunications Minister Andimuthu Raja had resigned from Singh’s cabinet, denying any wrongdoing.

Singh told his party workers on Dec. 20 that he would punish anyone found guilty in multiple probes into the alleged scam and he offered to face the Public Accounts Committee, a panel of lawmakers examining the auditor’s auction report.

Bharat Forge Expects China Parts Venture to Post Annual Profit This Year

Bharat Forge Ltd., India’s biggest automotive forgings maker, expects its China venture to post an annual profit for the first time since it began four years ago.

“The Chinese joint venture has turned around completely,” Amit Kalyani, executive director at the Pune-based company, said in an e-mail interview. “We are looking at expanding its product portfolio and increasing the customer base.”

Bharat Forge’s billionaire chairman Baba Kalyani aims to tap demand for auto parts in China where car sales may climb by as much as 15 percent in 2011, according to estimates by General Motors Co. and Volkswagen AG. Next year, sales in the world’s largest automobile market may reach 20 million vehicles, according to Booz & Co. and Nomura Holdings Inc. analysts.

“Going by recent performance, I expect significant improvement in the profitability of the venture as future demand in China will continue to be high,” Suprit Nayak, a Noida, India-based analyst at Religare Technova Ltd., said by phone.

Sales of passenger cars to dealers in China increased 29.3 percent in November from a year earlier to a monthly record of 1.34 million units, according to the China Association of Automobile Manufacturers.

Bharat Forge, which makes parts for Toyota Motor Corp. and General Motors, has climbed 37 percent in Mumbai trading this year, outperforming the 14 percent gain in the Bombay Stock Exchange’s Sensitive Index. The shares fell 0.8 percent to 373.35 rupees at the 3.30 p.m. close of trading in the city.

Venture’s Loss

Faw Bharat Forge Changchun Co., 52 percent owned by the Indian company, posted a loss of 315 million rupees ($7 million) in 2009. The venture started operations in 2006.

“The China operations will make a profit for the full year,” said Bharat Forge spokesman, S. Rajhagopalan. “This is due to increase in capacity utilization, restructuring and improvement in efficiency parameters.”

The venture’s profits will be announced in May when Bharat Forge reports its full-year earnings, he said.

India and the Asia-Pacific region contributed 47 percent of Bharat Forge’s sales of 33 billion rupees in the year ended in March, Kalyani said.

“This is expected to increase on the back of strong growth in the domestic automotive market,” he said, without elaborating.

India’s domestic passenger car sales rose 21 percent in November from a year earlier, according to the Society of Indian Automobile Manufacturers. Rising incomes may help boost annual car sales to 3 million vehicles by 2015, according to the government’s estimates.

Bharat Forge also makes components for the power, oil and gas and construction industries. The company plans to double revenue from its non-automotive business to 40 percent by March 2012, Kalyani said.

High growth fails to feed India’s hungry

The toll booths on the expressway between New Delhi, India’s capital, and the satellite city of Gurgaon tell their own story of the country’s fast-paced economic growth.

Interactive map: India’s uneven growth
India's Varying Growth

This interactive map explores the disparity in growth rates between India’s states

When the toll road was built, its architects forecast that by now 120,000 vehicles would pass through its gates daily. Today, about 210,000 stream through in a torrent of commuter traffic.

India’s economic growth is forecast at 8.5 per cent this year, making it the fastest growing large economy after China.

Yet the benefits of that economic boom are far from universal: the rapid growth is concentrated in a handful of states, particularly in the south, and among a tight circle of businesses.

The uneven economic performances in a country of continental proportions, alongside an unhealthy fixation with the headline growth rate among policymakers, have become issues of concern.

On Tuesday, Amartya Sen, the Nobel laureate economist, issued a stark warning to New Delhi about how “stupid” it was to aspire to double-digit economic growth without addressing the chronic undernourishment of tens of millions of Indians.

The country’s emergence as a responsible power hangs on the quality of its growth, and whether it is transforming the lives of its 1.2bn people. A growth map that resembles a patchwork quilt has given rise to a debate about whether India is expanding as one country and tackling poverty.

India’s gathering success is less assured when highly populated states such as Uttar Pradesh, Madhya Pradesh and Chhattisgarh – where per capita incomes are considerably lower than the national average – continue to fall behind.

Undernourishment is a vital indicator. Despite rising growth, the average calorie intake among India’s poorest has been stagnant for more than a decade. Eleven out of 19 states have more than 80 per cent anaemia, and more than half of India’s children under the age of five suffer stunting and poor brain development from inadequate nutrition.

Rather than seeking to drive growth higher, Prof Sen recommends higher public spending on health and education, and to take notice of how China has fed its people better.

This month, Jagdish Bhagwati, another Nobel Prize-winning economist and a professor at Columbia University in New York, stirred up debate by arguing that rising incomes were felt widely across the country and were not bypassing the poor. “[Success in] denting poverty significantly, though nowhere near enough, is that poverty is now seen by India’s poor and underprivileged to be removable,” he said.India economy map Thumbnail

Other academics warn against celebrating the achievements of India’s higher rates of economic growth prematurely.

“The Forbes list of Indian millionaires lingers a lot less in my memory than the images of misery that stare at us when we, the luckier Indians, step out of the comfort of our apartments,” says G. Sabarinathan, of the Indian Institute of Management in Bangalore.

India’s 28 states present a mixed picture, and a largely unchanging one. At the one extreme India is an industrialised and wealthy country, on the other it is stubbornly poor.

The states of Maharashtra, Gujarat, Karnataka, Tamil Nadu and Delhi are the established economies driving India’s growth, with dynamic manufacturing and service sectors. They generate the bulk of exports and attract the most foreign investment. There, incomes are rising among large urbanised workforces.

Then there is the rural and populous hinterland of Uttar Pradesh, Madhya Pradesh, Orissa, Chhattisgarh, Bihar and Jharkhand, long characterised by low growth and some of the lowest per capita income. Of these, Bihar, with a population of 90m, has surprised many by recently recording higher rates of growth. But Uttar Pradesh, with a population similar to Brazil and notorious for social marginalisation, trails badly.

For decades, the rankings of states by income by the International Monetary Fund and others has changed little.

This year, the World Bank warned: “In 2000, the [Indian] state with the highest per capita income average was four and a half times the per capita income of the poorest state. In 2008, the difference ... was almost unchanged.”

Billionaire Ambani Turns to China to Cut Costs

Billionaire Anil Ambani’s companies borrowed $3 billion from lenders including China Development Bank Corp. to gain cheaper funding after rupee borrowing costs climbed the most in four years.

Reliance Communications Ltd., India’s second-largest mobile phone operator, will borrow a part of $1.9 billion from the state-owned bank, which lends to support China’s policy aims, using $1.3 billion to repay existing credits, the company said Dec. 15. Reliance Power Ltd. will borrow $1.1 billion to help fund an electricity plant. Neither disclosed the cost of the loans. The yield on India’s top-rated five-year rupee corporate debt rose 73 basis points to 8.95 percent this year, the biggest gain since 2006, according to data compiled by Bloomberg.

“Reliance has to repay the debt and the China loans are an immediate solution because interest rates there are 1 to 3 percent cheaper,” Taina Erajuuri, who helps manage the equivalent of $1.2 billion of emerging-market stocks at Helsinki-based Fim Asset Management, including Indian stocks, said in an interview Dec. 21.

India has the highest 10-year government bond yields among Asia’s major economies, and the nation’s companies face rising borrowing costs in rupees and dollars. China Development Bank sold one-year debt last month at a 2.61 percent coupon, letting it support the global expansion of Chinese companies. The bank provided a $10 billion loan to Brazil’s state-run oil company Petroleo Brasileiro SA last year, and a $1 billion credit line in March to Russian bank VEB.

Average dollar yields in India have climbed to 5.17 percent from 4.27 percent in October, according to HSBC Holdings Plc indexes.

Chinese Equipment

The Reliance Anil Dhirubhai Ambani Group is increasing debt to generate 33 times more power and expand its phone connections nationwide. Anil, 51, gained control of telecoms, power and financial services and Mukesh Ambani, 53, kept the oil, gas and refinery and chemicals businesses after the brothers split Reliance Industries Ltd. in 2005. Both agreed to use the Reliance name.

Anil’s group plans to buy phone equipment from ZTE Corp. and Huawei Technologies Co. after India’s government allowed Chinese vendors to supply phone companies in July subject to security inspections.

Chinese companies signed $16 billion of deals with Indian businesses during Premier Wen Jiabao’s visit last week. Adani Power Ltd. placed orders for $3.6 billion of equipment with Chinese companies, while SRM Energy Ltd. gave $1.4 billion of contracts during the visit.

Rate Comparison

China Development Bank, which has lent more than $120 billion to fund China’s overseas projects, is expanding its loans to Reliance as Indian banks’ costs jump amid a cash crunch. The lender opened a Moscow branch in September after setting up an office in Cairo last year. Bank officials didn’t respond yesterday to two telephone calls and a faxed request.

Chinese banks pay less than half as much as their Indian counterparts to borrow even after lending rates more than doubled this year. The Shanghai interbank rate for three-month loans advanced 16 basis points, or 0.16 percentage point, to 4.11 percent yesterday, up from 1.83 percent at the start of 2010, according to the National Interbank Funding Center. Indian three-month rates rose 25 basis points to 9.06 percent on Dec. 21 after starting the year at 4.60 percent, according to the India National Stock Exchange. They fell 6 basis points yesterday.

Treasury Spread

India’s rupee has advanced 1.8 percent this month, the biggest gain among Asia’s 10 most-traded currencies outside the yen. The rupee rose to a one-week high of 45.10 per dollar yesterday. The central bank said Dec. 16 it will repurchase 480 billion rupees ($10.6 billion) of debt over the next month to ease the cash crunch.

The yield on India’s benchmark 10-year bonds climbed 35 basis points this year and reached a two-year high on Dec. 6. Yields on the 7.8 percent bonds maturing in May 2020 held near the lowest in two months yesterday at 7.94 percent.

The rate is 464 basis points more than U.S. Treasuries, compared with 375 at the end of last year.

The cost of protecting the debt of government-owned State Bank of India, which some investors use as a proxy for the nation, increased 1 basis point to 159 on Dec. 21. The cost dropped to an eight-month low of 155 basis points on Dec. 16, according to CMA prices.

Interest Rates

India’s central bank kept interest rates unchanged on Dec. 16 after six increases this year. Reserve Bank of India Governor Duvvuri Subbarao said Dec. 16 that inflation is above the “comfort level.” The RBI aims to slow inflation to 4 percent to 4.5 percent from an 11-month low of 7.48 percent in November, he said Dec. 9.

“The RBI will raise interest rates by 25 basis points in January as inflation will continue to be a problem next year,” Fim Asset’s Erajuuri said. “Banks are going to be very prudent next year with lending. Even if they lend they could demand high interest rates from companies with high debt.”

Reliance Communications, based in Mumbai, has 378 billion rupees in gross debt, its latest results show. Reliance Power, also based in Mumbai, has about 531 billion rupees of bonds and loans, with some maturing in 2049, data compiled by Bloomberg show.

Generator Order

The electricity producer ordered $10 billion of coal-fired generators from Shanghai Electric Group Co. for plants in India, where supply falls short, curtailing growth. For the deal, Reliance Power signed a $12 billion financing agreement with Chinese banks in Shanghai, according to an Oct. 28 statement.

China’s investment in power plants may fall “slightly” this year to 660 billion yuan ($99 billion) as the government invests in cleaner energy sources, the China Electricity Council said in an Oct. 29 statement.

Ambani’s plan to cut debt by selling Reliance Communications’ mobile-phone transmission towers to GTL Infrastructure Ltd. was derailed in September after the companies failed to reach a deal.

India’s telecommunications equipment market faces government scrutiny because of security concerns spurred by mobile phone companies’ growing reliance on Chinese manufacturers. India blocked Huawei and ZTE, both based in Shenzhen, from selling network equipment to domestic phone carriers this year and in July allowed them to sell network gear in India subject to security checks.

Reliance Communications’ relationship with China Development Bank has grown as it started a pan-India GSM network, said Vikas Aggarwal, an analyst at ICRA Ltd., an affiliate of Moody’s Investors Service in New Delhi.

“It was when they did their entire 2G rollout, their dependence on Chinese vendors increased because Chinese vendors are cost-competitive,” Aggarwal said. The company got better terms for refinancing its debt for third-generation spectrum from China Development Bank than from Indian banks, Aggarwal said.

Home-Stretch Buying Lifts Merchants’ Spirits

The last-minute holiday surge is heralding the return of the American consumer, who is shedding the recession’s thrifty ways and rediscovering the pleasure of shopping.

The malls are jammed, parking lots snarled and sales expected to stay strong in the few remaining days before Christmas.

With new figures showing in-store sales up 5.5 percent on the final weekend before Christmas compared with last year, this holiday season is on track to be the healthiest since 2006.

Separately, online shopping has been fueling growth in total sales, while spending in stores on this Thursday alone may rival the levels reached the Friday after Thanksgiving.

And Christmas Eve still beckons the procrastinators. Of those with the majority of their shopping left to do, about 10 percent plan to be in stores on Friday, one survey suggests.

From the Pacific Northwest to New Jersey, a few consumers rushing in and out of the mall madness this week gave the sense that a healing economy meant it was fine to splurge a little bit.

“The air alone makes me want to shop,” said Michaya Pollard, 29, who had accompanied her children’s elementary school to Westlake Center mall in downtown Seattle to see the Christmas decorations.

After a particularly good year at the barber shop and salons that she owns, Ms. Pollard said she had spent several hours over the weekend buying extra gifts like a Coach bag for her sister. “I didn’t plan on spending more this year,” she said, but “I’m excited about their faces on Christmas day.”

Some women’s apparel items were sold out, bolstering the notion that women were buying for themselves again. A Patagonia white-fleece jacket in medium was available only at a store in tropical Honolulu, while an Anthropologie sweater coat decorated with poppies was out of stock at the company’s online store but available on eBay at a huge markup.

Retailers have begun to change their approach to the holiday season after two years in which they have had to mark down items as Christmas neared. Retailers now manage their inventory better across sectors like women’s apparel, for instance, and avoid the last-minute price-slashing of Christmases past.

“Retailers have become much better at playing this game,” Sherif Mityas, a partner in the retail practice of the consulting firm A. T. Kearney, said in an e-mail.

Still, promotions were heavy, with Lord & Taylor offering 20 percent off almost the entire store, and Kohl’s giving its Kohl’s cardholders 15 to 30 percent off all purchases.

Many stores were running low on inventory, which was actually a good thing for the retailers, Mr. Mityas said.

“Retailers have learned painful lessons around the balance of inventory, versus margin-crushing fire sales the last days before Christmas,” he said.

“Getting more consumers to pay higher prices earlier in the holiday season in fear of missing out on certain items at the last minute will serve retailers well in subsequent holiday seasons.”

The recession forced stores to regroup after a dismal holiday year in 2008, and one that showed just slight improvement last year.

According to the International Council of Shopping Centers, which tracks sales at chain stores open at least a year, November and December sales rose 1.1 percent in 2007, then declined 5.6 percent in 2008 and rose 2.3 percent in 2009.

This year, the council has already revised its estimates upward, and now expects chain store sales to rise 3.5 to 4 percent. That would rival prerecession spending levels, and be the biggest increase in holiday spending since 2006.

ShopperTrak, which estimates total retail sales, said on Wednesday that dollars spent this last weekend had risen 5.5 percent, to $18.83 billion, from last year, while traffic increased 3 percent.

As for the online shopping, which has outpaced in-store sales this year, the marketing research company comScore indicated that online sales increased 12 percent in the first 49 days of the holiday season, to $28.36 billion, compared with the same period last year.

Over all, apparel sales were strong, up 9.8 percent from Oct. 31 to Dec. 11 compared with last year, according to MasterCard Advisors SpendingPulse, which tracks all forms of payment, including cash and check.

Michael McNamara, vice president for research and analysis at SpendingPulse, noted that women’s apparel was up about 4.4 percent in the early holiday shopping season. “They’re perking up even since Black Friday a little bit — it’s the most positive season we’ve seen there since 2007,” he said. “Women are starting to buy for themselves again.”

Other stores, including J. Crew and a few teenage-oriented retailers, appeared to have ordered too much and were trying to adjust, said John D. Morris, an analyst with BMO Capital Markets. J. Crew, for instance, has been resorting to offers that give 25 or 30 percent off the entire store.

“Not all retailers are crossing the finish line in fighting shape,” Mr. Morris said in an e-mail.

India's GDP Growth May Lure Record Foreign Fund Inflows, IDBI Federal Says

Indian stock purchases by foreign funds in 2011 could exceed this year’s record inflows as the nation’s robust economic and corporate earnings expansion lures investors, according to the local partner of Ageas, the insurer that groups the remains of Fortis.

“The stage is set for it,” Aneesh Srivastava, who manages about $352 million in assets as the Mumbai-based chief investment officer at IDBI Federal Life Insurance Co., said in an interview today. “Money chases growth. Returns in foreign economies are small and they have no other option but to look at growth opportunities outside.”

Foreign inflows into Indian equities have climbed to a record 1.3 trillion rupees ($28.8 billion) this year, according to data on the website of the Securities and Exchange Board of India, driving the Bombay Stock Exchange’s benchmark Sensitive Index, or Sensex, up 15 percent in 2010, the most among key indexes in the world’s 10 largest stock markets. “We are substantially underestimating the appetite and desire of foreign investors to buy Indian assets.”

Srivastava, 41, predicts India’s $1.3 trillion economy to grow at 8.5 percent for the year through March 2012, accompanied by a 20 percent expansion in corporate earnings. Gross domestic product grew 8.9 percent for a second straight quarter in the three months through September, maintaining the fastest pace among the world’s major economies after China.

‘Crude a Dampener’

Srivastava sees a “high probability” that the Sensex will reach 23,000 by March 2012, a 14 percent gain from today, and is “bullish” on the banking and oil & gas sectors.

“On an average, our bias will be to build portfolios with banks and oil & gas stocks,” he said.

Rising crude oil prices are the biggest risk to markets, Srivastava said. India, which imports more than 75 percent of its crude oil needs, is forecast to account for 15 percent of the global increase in energy demand to 2030, according to the International Energy Agency.

“Crude is a dampener. There is a severe winter in Europe, which is driving up demand for heating fuels and pushing prices up,” he said. If crude oil continues to rise, “economies like India could suffer and stock markets could correct.”

Thousands of airline and train passengers were marooned across Europe during a storm system that produced Britain’s worst early snowfall in 17 years this week.

Crude oil in New York trading reached $90.76 a barrel on Dec. 7, the highest level since 2008. Oil has gained 13 percent this year.

Credit Expansion

A pick-up in corporate demand and government spending will boost lending over the next 12 to 15 months, Srivastava said. He estimates loan growth of 22 percent for Indian lenders in the financial year 2012.

“The best way to play the banking theme is through large and clean private-sector banks,” Srivastava said, as they tend to do better in a rising interest-rate environment. He declined to comment on specific stocks.

Srivastava is also investing in oil companies’ stocks on expectations government policy changes may allow for market- driven fuel prices. India freed gasoline prices from state control in June, while continuing to set rates for other fuels, including diesel. The nation’s government will decide on a gas pricing policy in the next six to eight months, oil secretary S. Sundareshan said on Oct. 30.

“Policy direction is indicating that certain reforms could happen. If reforms clearly pan out, this is one sector that could outperform,” Srivastava said.

For Air Cargo, a Screening Conundrum

Ever since 9/11, each new security threat to airlines has increased the rigor of passenger screening. They have to remove their shoes and carry liquids only in small containers. They have to take off their belts and take laptops out of their cases. Now, they have to submit to full-body scanning machines and intrusive pat-downs.

But since the discovery in October of explosives from Yemen hidden in ink cartridges on cargo planes, the $50 billion freight business has seen little of the same kind of escalating security.

Even in the midst of one of the air cargo industry’s busiest periods of the year, governments and aviation experts continue to struggle to come up with ways to strengthen cargo security without paralyzing a business essential to global trade.

Still, that could change. Cargo safety has suddenly emerged as one of the biggest topics in aviation security. Governments around the world have pledged to tackle the problem, while in Congress, lawmakers are calling for much tougher inspections of cargo.

The cargo industry has resisted one idea: screening all cargo. It argues that such a step is impractical since most airports do not have the space to screen all the packages shipped each day. And some goods, including perishable products and medical supplies, may not survive a long wait at the airport to be screened.

“It’s the old conundrum,” said Billie Vincent, a former security director for the Federal Aviation Administration. “Do you put the industry out of business in the process of making it safe?”

Screening passengers is far simpler than inspecting cargo. More than 1,600 airports worldwide are funneling passengers through security lines and metal detectors.

But air cargo can come from countless sources and comprises countless kinds of goods, including fresh produce, medical supplies and electronic devices. The cargo industry itself is fragmented, too, with door-to-door shippers like DHL, United Parcel Service and FedEx; all-cargo airlines; and shipping companies that rent cargo space on passenger planes. Air cargo represents about 40 percent of the value of global trade.

As a result, the Transportation Security Administration, which handles all passenger screening in the United States, has taken a different approach to air cargo. It mostly relies on the cargo industry to screen its own freight. And freight is inspected in factories or in warehouses, by shippers, freight operators or airlines, in this country or overseas.

Reflecting the T.S.A.’s focus on passenger safety, it received $5.2 billion for aviation security in the last fiscal year and just $123 million for cargo security.

And while new safety procedures were adopted for passengers almost immediately after 9/11, it wasn’t until 2007 that Congress passed a law requiring all cargo on passenger planes to be screened. The new requirement has been in effect since August.

But Representative Edward J. Markey, Democrat of Massachusetts, who wrote the mandate, said it still left a “safety loophole” because freight on cargo planes, which accounts for 85 percent of all air cargo, is not subject to the same screening. After the Yemen incident, Mr. Markey introduced a bill to extend the screening mandate to all cargo planes.

“As the terrorists are turning to cargo planes as a delivery device for their deadly plans, we now need to secure cargo planes,” Mr. Markey said recently. “We simply can’t afford to leave this vulnerability open.”

Cargo experts contend that it is far more effective to focus on packages coming from risky countries, or from unknown shippers with no track record of business or those who pay in cash. Well-established companies that ship goods regularly, the experts say, present much less of a safety risk and therefore require less scrutiny.

“Screening every piece of freight on every single freight aircraft coming or leaving the United States would be a tremendous challenge and would not equate to 100 percent air cargo security,” said Brandon Fried, the president of the Airforwarders Association, an industry trade group. “The focus should be on who is shipping what, and where.”

Asian Stocks Rise as Commodity Firms Gain; Korea Climbs as Tension Eases

Asian stocks rose as commodity prices advanced and a Federal Reserve official said U.S. economic growth next year may be stronger than some economists forecast, boosting confidence in a global economic recovery.

Komatsu Ltd., the world’s second-biggest maker of earthmoving machines, gained 1 percent Tokyo. BHP Billiton Ltd., the world’s No. 1 mining company and Australia’s top oil producer, climbed 0.9 percent in Sydney today. Hyundai Engineering & Construction Co. advanced 4 percent in Seoul after parent Hyundai Group’s bid to buy South Korea’s largest builder collapsed.

“Consensus is forming that the global economy is gradually getting better,” said Kenichi Hirano, general manager and strategist at Tachibana Securities Co. “Growth in the world economy is boosting commodity prices, and surplus money is going into commodities and stocks.”

The MSCI Asia Pacific Index rose 0.3 percent to 133.73 as of 9:51 a.m. in Tokyo, with three stocks increasing for each that fell. The gauge climbed to a 2 1/2-year intraday high on Dec. 14 as U.S. economic reports boosted confidence in a global recovery, easing concerns that Europe’s debt crisis and China’s measures to slow inflation will hurt growth.

Japan’s Nikkei 225 Stock Average climbed 0.6 percent. Australia’s S&P/ASX 200 Index rose 0.5 percent and New Zealand’s NZX 50 Index both increased 0.3 percent.

South Korea’s Kospi Index gained 0.8 percent as tensions on the Korean peninsula eased after the North did not retaliate to military drills on a disputed island.

Futures on the Standard & Poor’s 500 Index were little changed today. The index climbed 0.3 percent yesterday in New York as Barclays Plc raised its share-price estimate on Amazon.com Inc. and energy shares rallied. The index is near its closing level on Sept. 12, 2008, the last trading day before the bankruptcy filing of Lehman Brothers Holdings Inc.

U.S. Data ‘Bodes Well’

Federal Reserve Bank of St. Louis President James Bullard said provision of stimulus is “reviewable and changeable” depending on economic growth, which may be stronger next year than some economists forecast. Bullard said in an interview with CNBC yesterday that while Europe’s fiscal crisis is “very serious” and may continue for “quite a while,” recent U.S. economic data “bodes well” for 2011.

Crude oil for January delivery increased 79 cents to settle at $88.81 a barrel in New York yesterday on speculation U.S. economic growth will accelerate next year, bolstering demand in the world’s biggest oil-consuming country. The London Metal Exchange Index of six metals including copper and aluminum climbed 1.1 percent yesterday, rising for second day.

The MSCI Asia Pacific Index increased 11 percent this year through yesterday, compared with gains of 12 percent by the S&P 500 and 9.6 percent by the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 14.7 times estimated earnings on average at yesterday’s close, versus 14.6 times for the S&P 500 and 12.3 times for the Stoxx 600.

Rupee Futures Beat Stock Trading Growth in `Thriller' Market: India Credit

India’s two-year-old market for currency futures is growing faster than that for stocks after attracting individual investors with transaction costs that are almost 50 percent lower.

The average volume of bets on the rupee’s value at a future date jumped more than threefold this year to $3.2 billion a day on the National Stock Exchange of India Ltd., which introduced the contracts in September 2008. Average daily turnover in the decade-old equity derivatives market rose 56 percent to $22 billion, according to the bourse’s website.

“Currency trading can be a thriller,” said Aarukettil Krishnankutty Sugunan, a 61-year-old glass and plywood merchant based in the southern Indian city of Kochi. “Broker fee and margin amounts are very low in rupee, and that allows me to make bigger bets.”

Investors are moving into futures as the median forecast of 16 analysts surveyed by Bloomberg shows the rupee will climb 2.6 percent by the end of March, outperforming Asia’s most-traded currencies except the South Korean won and the Philippine peso. One-month volatility, a measure of exchange-rate swings used to price options, is the second highest in the region at 9.5 percent, increasing scope for traders to make a profit.

The rupee’s 2.3 percent gain this year was driven by inflows from overseas investors seeking to benefit from the nation’s higher yields. India’s three-year government bond yield of 7.37 percent is the highest among the major emerging economies except Brazil, where similar-maturity notes pay 12.67 percent. Comparable securities offer 3.27 percent in China and 6.95 percent in Russia.

Geojit BNP Paribas Financial Services Ltd., a brokerage partly owned by France’s largest bank, charges 200 rupees ($4.40) as commission on a foreign-exchange investment of 1 million rupees, compared with 385 rupees for stock futures.

Lower Margin Requirements

The brokerage requires individuals to put down 3 percent of planned rupee-futures investments, known as a margin payment, compared with at least 10 percent for equity derivatives. Rupee derivatives are also exempt from a securities transaction tax that is levied on all other exchange-traded securities, Renjith R.G., the Mumbai-based head of sales at Geojit BNP Paribas, said in an interview on Dec. 16.

“It’s much easier for short-term traders to enter and exit currency futures because of the lower margin requirements,” Renjith said. “The absence of a transaction tax helps reduce the broker fee.”

Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

India’s currency was the world’s most-traded in the futures markets in the first half of 2010, followed by the dollar and the euro, according to data from the Washington-based Futures Industry Association.

Investment Inflows

The rupee appreciated 1.3 percent against the dollar this month, the biggest advance after Taiwan’s dollar among Asia’s 10-most traded currencies, according to data compiled by Bloomberg. The currency dropped 0.3 percent to 45.47 per dollar yesterday on concern tensions on the Korean peninsula will damp demand for emerging-market assets.

Ten-year bonds declined yesterday on speculation a cash shortage in the banking system will lower appetite for debt. The yield on the 7.80 percent bonds due May 2020 climbed two basis points, or 0.02 percentage point, to 7.97 percent at the 5 p.m. close in Mumbai, according to the central bank’s trading system.

Government Bonds

India’s government bonds returned 5 percent this year, compared with 1.5 percent earned on Chinese debt, according to indexes compiled by London-based HSBC Holdings Plc. Global investors have poured an unprecedented $38 billion this year into stocks and bonds of Asia’s third-biggest economy, data from the Securities & Exchange Board of India show.

Credit-default swaps on State Bank of India, the nation’s biggest lender, have slid 23 basis points this month to 156, according to data provider CMA. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Countering Risk

The inflows have pushed up the implied volatility on one- month dollar-rupee options to an average 11 percent since the start of 2008, compared with 5.2 percent over the previous three years, data compiled by Bloomberg show.

The jump in the rupee’s volatility increased the need for a wider range of tools to guard against adverse exchange-rate fluctuations, Divya Malik Lahiri, a spokeswoman for the National Stock Exchange, said in an interview on Dec. 16.

“Rupee futures have been very helpful in countering currency risk in commodity trade,” Salu Cholayil Kuriakose, a 38-year-old coffee trader based in Sultan Bathery in the southern state of Kerala with exports to Belgium and the U.K., said in a Dec. 3 interview. “We simply didn’t have access to practical and cost-effective means for hedging foreign-exchange risk earlier.”

Options contracts signal investors have turned more optimistic on the rupee. The premium paid for options offering protection against possible declines in the currency in a month declined to 180 basis points yesterday from 220 on Nov. 30, data compiled by Bloomberg show.

‘Exceeded Expectations’

The so-called risk-reversal rate was 146 for Russia’s ruble and 311 basis points for Brazil’s real. The measure for China was at negative 11 basis points, meaning investors are more bearish on the dollar than on the yuan.

Exchange-rate futures have grown in popularity after companies in India suffered losses on customized derivative contracts as the credit crisis of 2008 fueled a surge in foreign-exchange swings. Hong Kong-based brokerage CLSA Ltd. estimated the same year that the nation’s firms would lose $4 billion on derivatives.

Apart from the National Stock Exchange, rupee futures are traded on the Multi Commodity Exchange of India Ltd., the Bombay Stock Exchange and the three-month-old United Stock Exchange. The Mumbai-based bourses offer contracts for trading India’s currency against the dollar, the euro, the pound and the yen.

“The growth in currency futures so far has exceeded all expectations,” National Stock Exchange’s Lahiri said. “Retail participation will increase with more awareness.”

Indian investors frustrated by red tape

Economic growth rates of near 9 per cent in India are reviving interest in Asia’s third-largest economy among private equity groups. However, they warn that delays in project execution and high valuations are hobbling investment in a market dominated by family-owned companies.

Venture capital and private equity fund flows are forecast to reach as much as $17bn this year in India, Asia’s most volatile market for this investment class.

That would be near the pre-financial crisis high-water mark of $19bn in 2007 and more than four times 2009 levels, according to a study by Bain & Co, the consultancy. In two years, private equity market growth could exceed 25 per cent as investments flow into badly needed infrastructure development.

One of the latest signs of this trend was the decision by 3i, the UK private equity group, to set up a £1.5bn ($2.3bn) infrastructure fund for India next year, targeting investments in ports, roads and power.

However, the bulk of private equity money is coming from the US.

In the five years to 2009, close to $50bn in private equity investment was made in 1,400 Indian companies, with high-profile deals and divestments involving the likes of KKR, Singapore’s Temasek, Providence Capital, TPG Capital and WL Ross & Co.

The growth of Bharti Airtel, Idea Cellular, infrastructure group GMR and SKS Microfinance enjoyed considerable support from mainly foreign private equity investors. Successive investments in Bharti Airtel helped it become India’s largest mobile network: Warburg Pincus invested $290m in 1999, CVC International $210m in 2004, and Temasek $2bn three years ago.

Real estate and pharmaceuticals have traditionally attracted private equity but power and energy, automotive, textiles and entertainment and hospitality are now drawing interest.

But although a fast-growing economy is providing momentum, execution risks and a lack of skills particularly at the middle management level have weighed on private equity transactions.

Though India became the largest market for private equity in Asia in 2007 and 2008, activity there has been far more erratic than in China. In contrast to China’s state-dominated economy, India has a fluid small-business culture that responds quickly to booms but is more precarious when growth falters.

Deal activity in India was the most volatile in Asia in 2004 to 2009, reflecting a turbulent entrepreneurial business environment.

According to Bain, private equity in China grew at a 39 per cent rate compounded between 2004 and 2008, about half the pace of India’s private equity growth rate. But the 68 per cent drop in the value of private equity deals in India during the 2008-09 global financial crisis stands in stark contrast to the 12 per cent decline seen in China.

Grant Thornton, the auditors, believes private equity is back. Last week, its survey of 100 Indian companies showed that merger and acquisition values had risen to more than $45bn from January to November this year. Of these, private equity deals reflected an “improving climate,” totalling $5.27bn in the first 11 months of 2010.

“Indian entrepreneurs are realising the benefits of accessing risk capital from external investors,” says Siddhartha Nigam, a partner at Grant Thornton India. “Private equity is emerging as a logical step before accessing capital markets to not only invest for scale but also get the ‘house in order’ [ahead of a public listing].”

Sanjay Nayar, chief executive of KKR India Advisors, says rising valuations have made it “tough to find obvious value” and that worse, getting things done in India has become harder partly due to greater interference from the state.

Joseph Massey, chief executive of India’s MCX Stock Exchange, also blames much of the execution delay on red tape.

China signs $35bn in deals with Pakistan

Chinese premier Wen Jiabao has unveiled $35bn in economic deals with Pakistan, as part of a plan to commercially integrate the nation with China’s western region.

During a visit to Pakistan, Mr Wen on Sunday promised to create a deep alliance between Islamabad and Beijing based on economic co-operation that would tie the south Asian nation to China’s economic transformation. Mr Wen unveiled $20bn in government-to-government contracts and another $15bn in private sector deals.

China wants to diversify its relationship with Pakistan – which is based on supplying arms – to build infrastructure that would help China secure land access to the Arabian Sea. Such transport links would boost Chinese exports to the Middle East and Europe, and help secure energy and commodity imports from the Middle East and Africa.

The agreements outstrip the $16bn in deals China signed with India when Mr Wen recently visited Delhi. They are also a firm signal that Pakistan has an alternative to the US, which considers Pakistan a key – but not always reliable – ally in the fight against Islamic extremism and supplies considerable financial and military assistance.

The wide-ranging deals announced include the development of oil, gas and mineral resources in Pakistan. China also agreed to help Pakistan develop a space industry, expertise in oceanology, and more electronics and heavy industry.

The deals also include Chinese investment in the Karakoram Highway, which connects Islamabad to the north-western Chinese province of Xinjiang.

“This will be an important step for China to build road and rail links to eventually link Xinjiang to Pakistan’s southern coast along the Indian Ocean,” said a Pakistani official.

Mr Wen described the friendship between Beijing and Islamabad as “solid as a rock”, an affirmation that causes anxiety in India which views ties between China and Pakistan with increasing suspicion as a strategy to isolate it in south Asia.

Senior Pakistani officials applauded the magnitude of the Chinese engagement, saying the Chinese premier’s visit – the first in five years – represented Beijing’s most concerted attempt to help transform Pakistan’s economy.

Mr Wen told Pakistan’s parliament that China wanted to forge “deeper, closer and stronger” ties with Pakistan. The Chinese premier said “China and Pakistan will remain brothers for ever” in spite of Pakistan’s vulnerability to Islamist insurgency.

Shortly after Mr Wen spoke, Chaudhary Nisar Ali, leader of the opposition in parliament, said: “You can go to any corner of our country and ask anyone about China and they will only say, China is a true friend. We [politicians] may have our differences but there is no difference on China.”

But other senior politicians were careful not to interpret Chinese assistance as undermining efforts to secure a lasting peace with arch-rival India. Yusuf Raza Gilani, Pakistan’s prime minister, said the warmth of the bilateral relationship between his country and neighbouring China was “not directed against any country”.

Social Networks Meant for Social Good, at a Price

Over the last year or so, there has been an explosion of online intermediaries promising to help nonprofit groups raise money and awareness.

Crowdrise, Jumo, Causecast, Causes on Facebook and others try to use social networking and crowdsourcing to build interest in charities and causes, and to help them attract donations.

“2010 has really been the year of the social network for social good,” said Katya Andresen, chief operating officer at Network for Good, a nonprofit that handles processing and other administrative chores for many of the new sites.

In a recent study of online giving, Network for Good found that the experience when donating online is important to people. “I think many of these new sites are trying to make online giving, which is rather transactional in nature, an experience of greater intimacy, and that’s valuable,” Ms. Andresen said.

But to many in the nonprofit world, the value of the sites remains to be seen. For one thing, they hand partial control over charity brand names and trademarks to users who are often unknown to the nonprofit groups they support. And virtually all of them ask users to pay to donate.

“I think of them as disintermediaries because they stand between a nonprofit and its supporters, and what most of our clients’ value is establishing that direct connection,” said Gene Austin, chief executive of Convio, a company that provides technology to help nonprofits manage donor relations. “It’s especially concerning if they’re taking a cut on top of capturing eyeballs and individuals.”

To Mr. Austin and others, the new sites operate on a model that evokes memories of the United Way a decade ago. That organization began to lose ground when donors questioned why they should make donations through United Way — and give it a percentage of the money — when they could give directly to a charity.

“Moving toward a more donor-driven, pass-through model didn’t raise more money,” said Brian Gallagher, chief executive of the United Way of America.

Now, the United Way raises money around three core issues — education, health and income — which it addresses with proprietary programs. Its “pass-through” business, Mr. Gallagher said, has remained stagnant for the last five or six years.

“What we learned is that folks will pay you if they think they’re getting more value for what you’re offering,” Mr. Gallagher said, describing what his organization had learned. “They won’t pay you because you’re part of the commodity in the middle.”

The young entrepreneurs behind the new sites say their organizations are more than middlemen. “Saying the people can donate on an organization’s Web site misses the fact that nonprofits have to advertise to get people there, do marketing in various places to convince them to donate, cover credit card fees and pay for technology associated with their Web site and payment processing,” said Matthew Mahan, a representative of Causes.

Chris Hughes, the founder of Jumo, said his site was primarily about helping people connect with one another and with organizations around social missions, not about fund-raising.

“Jumo makes it easier for people to find an organization and stay in touch with it,” said Mr. Hughes, who is also a founder of Facebook. “That has a value.”

Crowdrise pitches itself as a tool to improve an individual’s fund-raising campaign, whether that is a celebrity like Barbra Streisand, who is raising money for the Cedars-Sinai Women’s Heart Center, or a person like Christine (Crowdrise users usually use only their given name), who is using the site to raise $60,000 for the Leukemia and Lymphoma Society.

“To us, Crowdrise is a complement or additive to whatever users are already doing,” said Robert Wolfe, one of its founders. “We don’t see this as a place for a charity to raise money for operational funds. It’s more for projects.”

First-Time Solar Producers May Imperil India's Clean Energy Push

India’s first solar auction, designed to boost clean energy in the world’s fourth-biggest polluter, may risk failure after winners were selected without experience or proof that they can keep projects afloat earning low margins.

A woolen yarn maker, an animation company and an industrial pipes supplier with no experience building power plants were among 37 winners of the government auction announced Dec. 13. The lowest bidders quoted prices that mean they may struggle to earn an attractive profit, said Bloomberg New Energy Finance analyst Bharat Bhushan.

“These projects aren’t going to get built,” Anmol Singh Jaggi, director of Gensol Consultants Pvt., which funds renewable energy projects, said in an interview. “I don’t see how they’ll get financed or get returns.”

India, which averages 300 sunny days a year, aims to generate 20 gigawatts of solar power by 2022, equivalent to 12 percent of its total electricity production today. A setback may delay solar’s development in Asia’s second-fastest growing major economy at a time when equipment makers, including Arizona-based First Solar Inc., face a potential supply glut and seek new markets as European countries slash solar subsidies.

The three largest projects went to companies experienced in building power plants: Lanco Infratech Ltd., KVK Energy Ventures Pvt. and Rajasthan Sun Technique, a unit of billionaire Anil Ambani’s Reliance Power Ltd. Abengoa SA, which has built plants in Spain and the U.S., and Acme Group, which is building a 10- megawatt solar thermal plant in India, were passed over.

‘Returns Not Important’

“The returns aren’t very important at this stage,” said Alok Nigam, Lanco’s vice president of business development. “What we wanted to ensure was we got a berth in the National Solar Mission.”

“Are these tariffs really sustainable on a long-term basis?” Nigam said. “I have my doubts.”

Under auction rules, project developers offering to sell their electricity at the cheapest rates were selected. The lowest solar photovoltaic bid price came in at 10.95 rupees (24 cents) per kilowatt-hour and the lowest solar thermal bid was 10.49 rupees per kilowatt-hour, offering discounts of more than 30 percent to government-proposed rates.

The auction awarded 470 megawatts of solar thermal capacity and 150 megawatts of photovoltaic capacity. New Energy Finance’s Bhushan said the seven solar thermal winners, including Lanco, KVK Energy and Rajasthan Sun, quoted bids that may be below the levelized cost of generation in India. The lowest photovoltaic rates may be at cost, he said.

Knitwear Maker, Animation

Levelized analysis compares the costs of energies produced from different sources after accounting for expenses such as financing and installation.

Bid winners included Oswal Woollen Mills Ltd., Kolkata- based Amrit Animation Pvt. and Megha Engineering & Infrastructures Ltd., which makes water-pumping equipment.

Oswal Woollen, based in Ludhiana, Punjab state, said in an e-mailed statement that it has run a 15-megawatt bio-gas plant and that concerns about its ability to build a solar facility were unfounded. “We will be more aggressive in the successful implementation of our solar energy plant,” it said. “You have to wait for only nine months.”

Megha Engineering has no experience in solar or building conventional power projects though it has “good financial strength,” R. Balaji, an engineer at the company’s power division, said by telephone. No website or contact details could be found immediately for Amrit Animation.

Skills Untested

Companies weren’t evaluated on their technical skills, Deepak Gupta, secretary at the New and Renewable Energy ministry, said Nov. 29. To prevent irresponsible bidding, companies had to pay bid bonds on projects and will be charged fines for delays or failure to build.

“I don’t think there’s a problem,” Gupta said after the auction. “There’s no reason why we shouldn’t reach our target.” The bids were probably accounting for declining equipment costs and cheaper financing, he said.

“I personally don’t believe it can happen” at these rates, said Petra Leue-Bahns, chief financial officer of Ecolutions Gmbh, a Frankfurt-based renewable energy investment company. Borrowing costs, banks’ reluctance to lend and a shortage of mandatory domestic equipment may also prevent projects from getting off the ground, she said.

“From the perspective of a risk-averse institutional investor, the whole story seems like a work-in-progress still,” Leue-Bahns said.

Costs, Complexities

Developers may be underestimating the cost and complexity of setting up solar plants, according to Mumbai-based Tata Power Co., India’s largest non-state electricity developer, which shunned the auction. “We do hope that the people who are bidding those numbers understand what it means to set up a solar project,” Executive Director Banmali Agrawala said in an interview. “It’s not a piece of cake.”

The auction drew bids for more than eight times the 620 megawatts of capacity offered as companies sought to benefit from government subsidies and power needs in India where peak electricity demand outstripped supply by more than 10 percent this year, according to the Central Electricity Authority.

The Asian Development Bank announced it plans to partially guarantee commercial bank loans to $425 million worth of solar investments in India to help the sector take off. “But the projects have to be credible,” said Sujata Gupta, head of the bank’s private sector group in India.

“What’s going to determine this market is projects that get done, that get financed, that get finished,” said Rana Mookherjee, senior director of project finance at Fremont, California-based Solaria Corp., which is making modules in India. “Success is what’s going to help this market take off.”

Telenor urges clean-up of India rules

Telenor has warned India that its unpredictable regulatory environment risks deterring foreign investment after the Norwegian mobile operator was drawn into a scandal over telecoms licences that has rocked the Indian government.

Jon Fredrik Baksaas, chief executive, urged India to “clean up the mess” surrounding telecoms regulation and said operators would not make big decisions over further investment without greater clarity.

“This is very negative for the industry, it is negative for foreign direct investment and it is negative for customers because to expand mobile coverage will take longer with this kind of uncertainty,” he told the Financial Times.

Telenor is one of several operators facing possible licence cancellations in India as part of an investigation into suspected irregularities during the allocation of second-generation spectrum two years ago.

The scandal caused the resignation of Andimuthu Raja as telecoms minister amid claims the government lost $39bn by handing out licences too cheaply.

Mr Baksaas insisted Telenor had done nothing wrong. “We have fulfilled our side of the deal in terms of deploying resources. We expect the government to honour their commitments.”

He said the dispute fitted a broader pattern of regulatory uncertainty in India. “The weakness that we’ve seen recently in many sectors – not just telecoms – is something India needs to sort out because it hurts India’s reputation internationally.”

Telenor is one of several foreign operators active in India’s fiercely competitive mobile industry, alongside Vodafone of the UK, DoCoMo of Japan and Singapore Telecommunications among others.

India is the world’s second-largest mobile industry by subscribers after China, with more than 600m users and it is forecast to almost double in size by 2015, according to official estimates.

Telenor secured its Indian licences as part of the acquisition of Unitech, a local telecoms company, in 2008. It had 13.5m Indian subscribers at the end of October.

The Oslo-based group is one of the world’s biggest emerging market mobile operators with a presence in 11 markets from Hungary to Malaysia.

Investors have shown little enthusiasm for Telenor’s Indian business amid concern over the heavy capital expenditure and low margins associated with the market.

“We went into India at the same time as the financial crisis in the autumn of 2008, which was a period when investors were shying away from emerging market risk,” recalls Mr Baksaas.

He added: “We are not very proud of the effect that had on the stock price.”

He insisted that Telenor remained committed to its Indian strategy but said decisions over further investment – such as whether to take part in predicted industry consolidation – would depend on the regulatory environment.

Shares in Telenor are up 15 per cent so far this year and Mr Baksaas said it had started to “win back investors’ trust”.

Default Swaps Show State Bank Beating China, Russia Rivals: India Credit

The cost of protecting State Bank of India’s debt from default fell for 11 straight days, the longest stretch of declines since at least 2004, as lenders’ willingness to extend loans underscores an improving economy.

Credit-default swaps on Mumbai-based State Bank dropped 55 basis points, or 0.55 percentage point, in the past six months to 155 on Dec. 16, CMA data show. Bank of China Ltd. contracts fell 24 basis points to 118 while those for OAO Sberbank, Russia’s largest lender, declined 11 to 188.

The perceived creditworthiness of India’s biggest bank improved faster than for lenders in the other largest emerging markets as companies step up borrowing for construction projects. Prime Minister Manmohan Singh is targeting 9 percent growth for at least the next three decades and plans to spend about $1 trillion on roads, ports and public infrastructure.

“India’s Reserve Bank has been prompt in raising rates to head off inflation, the economy is strong, non-performing loan ratios are under control and bank credit-default swaps are reflecting that,” Vijay Chander, Hong Kong-based head of credit strategy at Standard Chartered Plc, said in an interview.

International bond sales in India climbed to $11.2 billion this year from $2.4 billion in 2009, with bank debt accounting for 60 percent, according to data compiled by Bloomberg. New bond sales from Indian banks could reach as much as $7 billion next year, according to Nomura Holdings Inc. As India seeks funds for key infrastructure projects “foreign capital may prove even more useful,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in a Dec. 2 speech.

Infrastructure Demand

“There’s greater demand for infrastructure lending,” Nondas Nicolaides, senior banking analyst with Moody’s Investors Service, said in a phone interview from Limassol, Cyprus. “India is an economy with such great growth potential that I don’t see a problem for even the smaller banks selling dollar bonds.”

The outlook for India’s banking system is conducive to high credit growth as economic expansion returns to pre-crisis levels and deposits increase, Moody’s said in a report Dec. 16.

The yield on Bank of India’s $500 million of 4.75 percent notes due in September 2015 fell 41 basis points to 235 more than Treasuries since Dec. 1, BNP Paribas SA prices show. The decline compares with a 55 basis point drop for Bank of Moscow OJSC’s $750 million of 6.699 percent notes due in March 2015. The yield on Banco Santander Brasil SA’s $500 million of 4.5 percent bonds, due April 2015, fell 46 basis points to 266 over the same period.

‘Not Much Downside’

Indian banks that “underperformed” in the recent Asian corporate bond rally now look good value, according to Royal Bank of Scotland Group Plc research.

“For credit investors I don’t see much downside,” Kristine Li, Asia-Pacific credit strategist at Royal Bank of Scotland said in an interview from Singapore. “Indian banks have better fundamentals in terms of asset quality and earnings stability, and the tighter spreads versus Russia and Brazil are well justified.”

Indian dollar bonds returned 9.4 percent this year. The extra yield investors demand to hold the notes rather than U.S. Treasuries fell six basis points last week and dropped 80 basis points to 334 this half, according to HSBC Holdings Plc’s Asia Dollar Bond Index for India, in which banks have a 71 percent weighting. That compares with a 99 basis-point decrease for dollar bonds of Asian banks, JPMorgan Chase & Co.’s Financials Blended Spread index show.

A rise in dollar funding costs meant some Indian banks postponed sales. Union Bank of India may delay a planned sale of notes on rising London interbank rates, Chairman M.V. Nair said in New Delhi last week.

‘Aggressive on Pricing’

“Indian banks tend to be market opportunistic and relatively aggressive on new issue pricing,” Li said, citing domestic liquidity as another risk. With “more money flowing into emerging markets, spreads compressing across Asian banks and Indian banks showing strong earnings results, their credit ought to catch up with the rest of Asian banks,” Li said.

BES Investimento do Brasil SA’s $500 million of 5.625 percent notes due March 2015, rated the second-lowest Baa2 investment-grade by Moody’s, are trading at a yield of 506 basis points more than Treasuries, according to Trace. Similar-rated 4.75 percent bonds due October 2015 from Vadodara, Gujarat-based Bank of Baroda trade at a spread of 272 basis points, BNP Paribas prices show.

Regulators seeking to rein in the sort of risks that caused the financial crisis reached a compromise in Switzerland in September that more than doubles capital requirements for the world’s banks while giving them as long as eight years to comply.

Rupee Falls

The Basel Committee on Banking Supervision wants banks to hold enough assets that can be converted into cash to meet their needs in a “severe liquidity stress scenario,” according to a document. While India’s central bank hasn’t said whether it will adopt the so-called Basel III accord, banks are “well positioned to make the transition to a stricter capital regime,” Moody’s said in its report.

Contracts protecting debt of ICICI Bank Ltd., India’s second-largest lender, fell 21 basis points this month to 193 basis points, after reaching a two-month low of 191.5 last week, CMA prices show. The bank’s default swaps have dropped 62 basis points since July 1.

The rupee fell last week after two weeks of gains. The rupee lost 0.7 percent during the week to 45.3550 per dollar. Indian markets were closed Dec. 17 for a holiday.

Government bonds rose in the week, driving yields to the lowest level in a month and a half, after the central bank said it would repurchase 480 billion rupees ($10.6 billion) of debt over four weeks to boost cash at banks.

The yield on the 7.80 percent note due May 2020 fell 12 basis points to 7.95 percent, according to the central bank’s trading system. The yield decreased 13 basis points.