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Coming up: a BRICS currency?
A Vellayan, Chairman, Murugappa Group, was part of the delegation that accompanied Prime Minister Manmohan Singh to the BRICS Summit at Durban.
VELLAYAN has been heading the Rs 22,500 crore Murugappa Group, a leader in agriculture, engineering and financial services.  Excerpts from an interview with Vellayan:

On BRICS...

Conceptually this grouping of five nations is a welcome attempt. These countries are resource-rich and are large consumers of natural resources. It would be advantageous to leverage their individual strengths and capabilities.

There is great interest in working towards a common currency which in course of time can be an alternative to the present dollar dominated trade. Such a common currency will be a  trade-based currency and not geography-based like the euro. In the current phase, with the European countries passing through an economic stagnation, such a common currency can become the only alternative to the dollar in value terms. Already China has been effectively using its currency RMB for bilateral trade with some of its trading partners.

A task force has been formed to work out the prospects for such a common currency. Of course there are concerns and problems on the role of the five nations. The major constituents in terms of the economic strength and natural resources are Brazil and China followed by India and Russia. South Africa is a relatively small player. To make the move successful, the first step is to deal inter-trade on the national currencies; for instance, South Africa and India can conclude trade agreements in rand-rupee. In course of time, a bank on the lines of the European Central Bank can be formed with a capital of 100 billion dollars.

At present, trade among these five countries is almost free: there is no import licensing and only duties control trade and these duties are WTO  - based. However, China doesn’t seem to bother about WTO; China is self -sufficient in several areas. Also, except India, the other four countries have a sovereign fund to support their national companies.

Russia and South Africa control most of the world’s platinum and diamonds. Brazil, China and India are large importers of raw materials for fertilizers. These countries spend huge amounts on several commodities. Among the five, Brazil, China and Russia are much stronger than the other two. Particularly in agriculture, Brazil is well-endowed and has gone about systematic development and the government quite focused on trade issues.

Sugar decontrol will do good...

For over three decades, the sugar industry has been presenting a strong case for freedom from levy sugar obligations and control over releases. Vellayan is understandably happy over the recent liberalisation. He pointed to sugar mills suffering liquidity problems to pay sugarcane farmers on time: “in UP the average cost of sugar is less than the cost of cane. How can mills pay the farmers?” He pointed to mills doing murky deals to surf over their liquidity problems.

Vellayan referred to the expansion of sugar industry in Karnataka, Gujarat and Madhya Pradesh. These states have systematically spent on expanding their canal infrastructure and use more effectively river waters flowing to the sea. He recorded his appreciation for states spending resources effectively for development of canals.

Another positive feature of the policy relates to ethanol: “this would bring down the quantum of import of crude oil and give extra income to sugar mills through better prices for molasses. This will improve the liquidity of mills and enable them to pay farmers on time. The policy of doing away with government controlled releases was also welcome. This allows the mills to sell sugar anywhere,” said Vellayan.


The only issue under government control relates to export and imports. Vellayan expressed the hope that the inter-ministerial committee will rationally assess and facilitate trade.

Vellayan expects sugar prices to come down marginally over the short term. But over time, on weighted average, sugar mills will gain 70 to 80 paise per kilogramme and consumer price may stabilise around Rs 36-Rs 40 per kg.

EID Parry India Ltd., a unit of the Murugappa group, had a turnover of Rs 1965 crore for 2012-13. Silkroad Sugars set up at Kakinada to be run on natural gas for international trade is in the process of commissioning its coal-based boiler. The unit is expected to commence operation during 2014-15. The coastbased plant will be geared up for refining imported raw sugar for global trade.

Better prospects for fertilizers...

The Murugappa group is a major player in the fertilizer sector. Coromandel International Ltd(CIL), the flagship company of the group, had a turnover of Rs 9103 crore for 2012-13. In line with other companies, CIL was also affected by the delayed onset of monsoon during the last season and to the significant disparity in prices between urea and phosphatic fertilizers that affected demand for phosphatic fertilizers. CIL has capacity to produce 4 million tonnes of complex fertilizers.

Vellayan estimated the current stock in the market at 7 million tonnes. When the government reduced the subsidy on phosphatic fertilizers, urea consumption went up and there was a drop in phosphate consumption by 25 per cent. On top of this, non-traditional players also entered the fray to make use of the liberal import policy. This resulted in skewed consumption. In the recent policy, there is a reduction in nutrition based subsidy and also a drop in the international prices of raw materials. This has resulted in the drop in the prices of DAP by Rs 1500 per tonne and potash by Rs 1000 per tonne apart from the reduction in subsidy.

Vellayan estimated a saving of Rs 6000 crore through reduction of the NBS subsidy for phosphates and potash. If they do this also for urea another around Rs 11,000 crore would be saved. A welcome feature of such a step will be a more balanced use of nutrients in the ratio of 4:2:1 desired for N:P:K. But can this change be effected in an election year, Vellayan wondered.

The group is strong in agri-business, engineering and financial services. The first two sectors suffered a decline or stagnation in their overall performance but financial services division through Cholamandalam Finance Co and Cholamandalam MS General Insurance recorded handsome growth in gross sales and profits. The group that has been maintaining 25-30 per cent growth in gross sales in recent years, just managed to maintain sales at Rs 22,466 crore - about the same level as in the previous year. Vellayan pointed to the cash-rich group focusing its efforts on new acquisitions that included Shanti Gears Ltd, Liberty Phosphate Ltd, Thukela Refractory and also entered into a share purchase agreement to acquire 8.13 per cent stake in AP Gas Corporation Ltd. Through the year the group sold around 4 million bicycles and retained its number two position.

Vellayan sees potential in South East Asia and China. Indonesia, Malaysia and Thailand show prospects for sustained growth but there is acute competition from Japan and South Korea. The group focuses on supplies to manufacturers in these countries. In regard to China, Vellayan points to difficulty in doing business: “it is a one way street; entering the market as a foreigner is tough,” he said. This business leader wondered why India is so open, allowing them to do business in India while Indian businesses face lots of restrictions!



He also expressed concern over the erosion in the competitiveness index for manufacturing. The capital output ratio has declined to 6:1(at the peak of economic boom of 2005-08 it was 4:1). He wished the policy makers to work towards correcting this in quick time. 
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