Govt may allocate gas to RCF from ONGC instead of RIL

New Delhi: The government may give Rashtriya Chemicals and Fertilizers (RCF) natural gas from Oil and Natural Gas Corporation’s (ONGC) western offshore C-Series fields in place of cheaper KG-D6 gas it currently gets from Reliance Industries (RIL).

RCF currently buys 0.95 million standard cubic meters per day (mmscmd) of KG-D6 gas at $4.205 per million British thermal unit (mmBtu) for use as feedstock at its Trombay plant and another 2.1 mmscmd for its Thal unit.

The government plans to replace KG-D6 gas at these plants with the fuel being produced by ONGC from its C-Series fields, which is priced at $5.25 per mmBtu, official sources said.

This follows government allocations far exceeding the supplies from KG-D6. While the government has allocated users for about 64 mmscmd of KG-D6 gas, Reliance says it can currently produce only 60 mmscmd on sustained basis.

The mismatch between the allocation and actual production forced the government to switch users like RCF to ONGC, they said, adding ONGC is to produce between 2.1 and 3 mmscmd from the C-Series fields.

The delivered price of KG-D6 gas in the Trombay region is $6.52 per mmBtu ($4.205 per mmBtu plus $0.135 for marketing margin, $0.87 towards central sales tax of 2%, $1.45 for transportation through East-West pipeline and $0.64 per mmBtu tariff of GAIL's pipeline).

On the other hand, the ONGC gas would cost RCF $6.76 per mmBtu ($5.25 plus $0.12 for marketing margin, $0.64 in transportation tariff through GAIL pipeline and $0.75 per mmBtu in local sales tax of 12.5%).

Sources said while KG-D6 was an inter-state sales attracting a central sales tax of 2%, ONGC gas sales would attract Maharashtra government sales tax.

The gas vacated by RCF would go to companies like Essar Oil's Vadinar oil refinery in Gujarat, which has so far not been able to sign contract with Reliance for the 0.6 mmscmd that was allocated to it.

Sources said Reliance has told the oil ministry that it can at present sustain output of only 53-54 mmscmd from the Dhirubhai-1 and 3 fields in the KG-D6 block and 7-8 mmscmd from the MA field in the same area.

The company had in December last year tested facilities at KG-D6 for a peak production rate of 80 mmscmd, but it estimates this level of production can only be achieved in 2012.

Of the current production, about 14 mmscmd is sold to fertilizer plants, 28 mmscmd to power plants and 10 mmscmd to petrochemical plants and refineries. The remaining seven mmscmd of gas was consumed by other sectors such as sponge iron plants, LPG, city gas distribution and the East-West pipeline.

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HSBC to go slow on retail banking, credit cards: Kidwai

Mumbai: The country's oldest foreign bank HSBC India has said it will go slow on retail and credit cards businesses as it wants to focus on global banking, investment banking, wealth management, insurance and mortgages as the key growth drivers in the country, reports PTI.

"We will not chase retail customers till we turnaround our loss-making retail lending and credit cards businesses. We hope to do so by the end of the year," HSBC India Group general manager and country head Naina Lal Kidwai told PTI in an exclusive interview here today.

Only last month, HSBC clinched a deal to acquire the retail and commercial banking business of Royal Bank of Scotland in India. RBS' 31 branches with a network of 1.1 million customers are expected to give HSBC greater exposure in the Indian market.

"HSBC won't go after customers to sell our retail banking or credit card products as that will impact the quality of our services, besides increasing our risk portfolio," Ms Kidwai, who was earlier this month appointed to the group's global board, added.

On whether the bank is planning to exit credit card business, Ms Kidwai quipped, "There is no such plan, but we will not be running after customers to sell a credit card or a personal loan. There is no plan whatsoever to discontinue this business, as we've a customer base of 1.5 million even today."

The RBS acquisition was the third major deal for HSBC in India.

In June 2008, HSBC entered into joint venture with Canara Bank and Oriental Bank of Commerce for insurance business, gaining access to a distribution network of 5,000 branches and 50 million customers.

In September of the same year, HSBC acquired IL&FS Investsmart, now HSBC InvestDirect, a major retail brokerage with more than 130,000 customers and outlets across 52 cities.

Explaining the reason for this go-slow approach, Ms Kidwai said, "Our rapid expansion in the past has led to the growth of some riskier assets and we don't want to grow that way. In fact, we have been going slow on retail banking since the past four years or so, and by the end of 2010, we will have more good numbers to share on this front.

To a query on what would then be the focus growth areas of the country's oldest multinational bank, she said, in the time to come the bank will be focusing more and more on global banking (corporate lending business), insurance, investment banking, mutual fund distribution, wealth management and mortgages as the key growth drivers in the country.

Apart from that NRI business and retail broking will also be other thrust areas for the global lender, which has an asset base of $2450 billion as on 30th June.

The retail business of the London-headquartered HSBC, which is the largest European lender, in the country has been making losses for the past four years and in the first half of 2010, it had reported a $50 million loss, even as it posted $340 million profit during the period-its best-ever numbers from the country so far, and thus becoming the third biggest profit centre for the group.

"This ($50 million) was not a loss in fact as this was our provisioning for bad debt being carried over since the past four years," Ms Kidwai said, adding "the losses you see are from when we scaled back" on credit cards and unsecured lending.

Established in Bombay as the Mercantile Bank of India way bank in 1853, HSBC is the oldest foreign bank in the country as also the largest in terms of market share (with a 35% share of the custody business) and in terms of people employed-35,000 as on 30th June, Ms Kidwai informed.

With 10% market share, HSBC is the largest MF distributor in the country and the largest bancassurance player. Its two-year-old insurance arm, Canara HSBC Oriental Bank of Commerce Life Insurance, has already become one of the top ten insurers in the country.

On whether the bank will be opening more branches, Ms Kidwai said they are only happy to do so provided the Reserve Bank of India (RBI) allows them. Currently HSBC has only 50 branches spanning 29 cities but is keen to open more as and when the RBI gives them the go ahead.
The banking industry is keenly watching the Reserve Bank move on new private sector bank licences, which is expected by the later part of this fiscal and a lot of domestic corporate biggies are keen on entering the space.

The government in the 2010-11 budget had said to speed up financial inclusion process, the Reserve Bank would be issuing more licences to private banks. Following this, the RBI is slated to come out with a discussion paper on the topic by the end of next month.

However, the central bank is not keen on allowing foreign banks to open more branches, but rather it wants them to open domestic subsidiaries as a means to expand.

When asked whether the bank will be open to go the subsidiary way, she said, "If the Reserve Bank wants us to go the subsidiary route, we are only happy to become a wholly-owned subsidiary like we do in other countries. Having said that let me add that when it comes to reporting financial numbers we have for long been reporting separate balance sheets, exactly as a subsidiary does."

Stating that HSBC has a high capital adequacy ratio (CAR) at 60%, on top of a negligible non-performing assets (NPA) level, which was primarily due to the personal loan and credit card businesses, Ms Kidwai said, the bank's current advance-deposit ratio is only 50%. But it wants to jack up to 75%, as part of increasing its balance sheet.

"The focus on mortgage business will help us achieve that target," Ms Kidwai, who joined HSBC in 2002, after her starting off with ANZ Grindlays Bank and then Morgan Stanley, which she helped set up in the country.

"We weren't lending in a huge way because we were managing liquidity across the group," Ms Kidwai, said, adding, "This year we have resumed lending and the impairments are really down."

Overall, India is the bank's third-largest contributor to profits in Asia Pacific, after Hong Kong and China, she said.

"India is actually much more profitable," Ms Kidwai said, adding "we make more money here than we make in China from the business."

To a query on whether the bank has any plan to do a StanChart, its rival from England that launched the country's first IDR issue in May this year and a subsequent listing, she said they have no plans as of now as such a step will require lot of regulatory and policy issues. Also the group's priority is the forthcoming Shanghai listing, she said.

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Has China surpassed Japan?

On purchasing power parity, China surpassed Japan ten years ago. However, on per capita income parameter, China is still a poor country.

China has overtaken Japan. In terms of US dollars the Chinese economy is expected to be the world's second largest economy by the end of the year surpassing Japan. Over the past decade, the Chinese economy has boomed while the Japanese economy has stagnated. This is especially true this year when China often experienced double-digit growth. In contrast Japan's most recent growth rate was an anaemic 0.4%. At this rate, China is expected to surpass the US economy by 2026 or even earlier. Of course, all economic forecasts have one thing in common. At some point in the future, they will be wrong.
 
For a start it is old news. China's GDP will most likely outstrip Japan's GDP this year is based solely on the total numbers expressed in dollar terms. If looked at in terms of the more accurate measure, Purchasing Power Parity (PPP), China surpassed Japan ten years ago. From another perspective, China has not passed Japan at all. It is still a poor country. Its per capita income is barely one tenth that of Japan. So the reality of the present level of China's economy varies depending on how you twist the numbers.
 
The real fanfare about the story comparing China to Japan was the projection that the Chinese economy would be the largest in the world within a relatively short period of time. Unlike the present numbers, which have some basis in reality, the projections simply do not. Let us look at some prior numbers.
 
In 1981, the per capita income of Saudi Arabia was 60% greater than the US. There seemed to be no reason at the time to believe that the statistic would change. Instead, today the situation is reversed. Even using PPP, the per capita income of Saudi Arabia is half that of the US. In the 1950s Latin America had incomes that were 25% of US levels. It was forecast that in a few decades they would catch up. At the time, the average income of Asia was only one tenth of America's. The forecast was that it would not change. What actually happened was the reverse. Asia's average income is 25% of the US while Latin America's relative wealth has actually declined. Their incomes are now only 20% of the US averages.
 
The probability is that the same thing could happen to China. Recently there have been stories that the US is going the way of Japan. Commentators have predicted that the US will like Japan have a lost decade of deflation and limited growth. The real comparison is between Japan and China and it is not about their relative GDPs.
 
The real comparison between China and Japan is their development model. This model has been used by various countries in various ways, but the theme is similar. Basically the government uses different policies to shift wealth away from households to investments in manufacturing and infrastructure. The process can be accomplished directly by taxing households and using the proceeds to provide subsidies for manufacturing and infrastructure as was done in Brazil during the 60's and 70's. Or it can be done indirectly as in Asia by restraining wages, undervaluing the currency, and keeping the cost of capital extremely low.
 
Often the Asian model has been mistaken as having something to do with culture rather than government policy. It is an article of faith among many economists that Asian cultures are somehow thriftier and better savers because of some sort of Confucian ethic. Of course this is just silly. Asians are just as happy as Americans to spend, if their governments let them do it, while the compulsive shoppers in America are now saving over 6% of income.
 
What government policy does do is distort the incentives and disincentives within the economy. Development models that shift wealth from consumption to investment by whatever means may, in the short run, produce exceptionally rapid growth, but there is a price to pay. When governments make the decisions instead of the market, the result is a misallocation of capital and in the case of Japan and now China massive overinvestment.
 
As the Chinese academician, Yu Yongding, recently pointed out, "A viable economy cannot be built on steel and concrete alone," and "China's problem is more its poor allocation of resources." But knowing what the problem is does not mean that it can be solved. Entrenched government policies in any country cannot be easily changed. Policies that distort markets build their own following. Political forces within the society who have profited from any given policy have enormous economic incentives to see those policies continue. In China the combination of local governments, developers, exporters, state owned industries and banks all have financial stakes in continuing the present policies at the expense of China's consumers, trading partners and ultimately the growth the economy.
 
So the reason why China has been able to overtake Japan economically is paradoxically the same reason why Japan's growth has faltered and why China's economy will soon follow suit.   

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
 

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COMMENTS

Liju Philip

6 years ago

interesting take on the subject. lovely read.

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