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HSBC India manufacturing PMI inches higher in June

During the month of June, the total new orders fell for the first time since March 2009. Export business, however, rose at the sharpest rate since January as demand from key foreign clients strengthened

India’s manufacturing sector activity remained broadly flat in June as new orders declined for the first time in over four years and power cuts and fragile economic conditions weighed on the sector’s performance, an HSBC survey said on Monday.

 

The HSBC/Markit purchasing managers index for the manufacturing industry stood at 50.3 in June, slightly higher than 50.1 in May. However, output witnessed a decline for the second consecutive month.

 

A reading above 50 shows expansion, while a reading below 50 indicates a contraction in the sector.

 

“Manufacturing activity was broadly flat in June. Output continued to contract due to power shortages, albeit less so than last month,” HSBC chief economist for India and ASEAN Leif Eskesen said. For the last two months, the index is barely managing to remain above the crucial 50 mark that divides growth from contraction, but has held above the mark for over four years now.

 

The May PMI reading for the manufacturing sector was the lowest since March 2009.

The survey further noted that economic conditions in India were fragile, resulting in lower demand. Moreover, there were also reports of increased competition for new work.

 

During the month of June, the total new orders fell for the first time since March 2009. Export business, however, rose at the sharpest rate since January as demand from key foreign clients strengthened.

 

“Despite the moderate pace of growth, output prices picked up slightly and input prices rose more notably, partly in response to the depreciation of the rupee,” Eskesen said.

 

On the price front, input cost inflation accelerated to the sharpest since February. But, inflation was, however, ‘modest’ as competition for new work persisted and weighed on pricing power, HSBC said.

 

The rupee last week sank to an all-time low of 60.72 against dollar on heavy capital outflows and month-end dollar demand from importers.

 

Meanwhile, June witnessed the fastest rise in employment since March. Manufacturers added to their workforce numbers in during the month considering the rising backlogs of work, HSBC said.

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Impact of the hike in gas price

The new price of gas at $8.40 will be applicable to all types of gas, shale, coal bed methane or conventional. Coal methane gas is more likely to be tapped as compared to shale because the latter requires enormous amounts of water in the separation process

The Cabinet Committee on Economic Affairs (CCEA), while accepting the Rangarajan Committee recommendation in toto, has approved the new price of indigenous gas, produced by Reliance Industries (RIL) and ONGC at $8.40 per mmBtu (million metric British thermal unit), with effect from 1 April 2014, as against the current rate of $4.20.  It has overruled the via media price of $6.77 proposed by the oil ministry. No explanation has been given!

 

The current ruling price of imported gas is around $ 14.17 per mmBtu, and the price of $8.40 is therefore cheaper, if that is a consolation!

 

It is now assumed that with this revision, gas producers like RIL and ONGC will be encouraged to pump out more gas out of their wells, if necessary, by bringing in additional balancing equipments and endeavour to explore new areas to locate gas. Such new finds will take three to four years to be able to supply gas.

 

The new price of gas at $8.40 will be applicable to all types of gas, shale, coal bed methane or conventional. There are reasonable prospects that coal methane gas is more likely to be tapped as compared to shale because the latter requires enormous amounts of water in the separation process.

 

Already, the fertilizer industry is up in arms on this increase. The impact on increased gas price (costs) is likely to be offset by a greater amount of subsidy by the government, which has been hinted by the finance minister during the interview when the announcement was made to increase the gas price. 

 

Why not allow the fertilizer industry to set its own market price, instead of control by the government?  The intention has been to ensure that the farmer got the subsidized fertilizer.  So far, so good, but what is really happening is that in the end, the farmer does not get the desired benefit, which is actually taken away by the landowner and/or the chain of middlemen who sell the produce.

 

Elimination of this group is essential, if it is the ultimate desire of the government to help the farmer. Besides, how long will the government go on subsidizing this industry?

 

This revised gas price, which is effect from 1 April 2014 is valid for five years, but will be reviewed every quarter, according to the Committee. What purpose will this serve?

 

The debate on pricing is likely to go on endlessly. Should there be any reference, if at all, to international market price, when deciding the price for indigenously produced gas?  In a way, yes, because if there was no production within the country, and the demand has to be met, it can done only by imports. Hence, technically, an attempt has been made to substitute imports by indigenous production and, as a sequel, we need to fix a notional and realistic price to the product.

 

Yet, a 100% increase from $ 4.20 to $ 8.40 is very high.

 

In the meantime, in order to meet the growing demand, bearing in mind the shortage and lower production at home, we have to continue our dependence on imports of LNG (liquefied natural gas) from our principal source of supply, the Emirate of Qatar, in the Gulf.

  

At the same time, India’s quest has taken long and arduous routes to obtain gas from Iran, Turkmenistan and Myanmar, via pipelines that will have to be laid in cooperation with countries which will have vulnerability as it has to pass through Pakistan, and Bangladesh. The discussions and negotiations have been going on for years now and with no result at the end of the tunnel. Is it a pipe dream? So, far, yes!

 

In regard to the new gas price, it is essential that the Committee urgently clarifies the following issues:

 

                 a) Why should the pricing be done in dollars when the production is indigenous?

 

                 b) assuming this to be relevant for relative pricing based on international (import) costs, why NOT the government peg the dollar-rupee ratios? If the rate today is Rs50.87 to a dollar, do they project the rate to go down or up?

 

                 c) from the assured production RIL failed to supply in the past two years, even presumably under the technicality of force majeure conditions, how do they plan to compensate the “loss of supplies” of the past, and how do they make up if this happens again?

 

                 d) since Qatar has abundant gas, and with whom we have close relations, why not the Government of India jointly set up one or two large urea plants in that country and import the finished product?  In return, they can guarantee essential commodity supplies—whether it is basmati rice or meat or any other products and services that Qatar may need?

 

It is imperative that the CCEA looks at these issues seriously.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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