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RESIDENT & NON-RESIDENT STATUSES I EMERGING SECTORS I MARKET NEWS

IndianEngineeringExports RS150

ie 2 I

Magazine of EEPC INDIA (formerly Engineering Export Promotion Council)

www.eepcindia.org

VOL. 3, ISSUE NO. 2, AUGUST 2010

INTERNATIONAL EDITION

With exports tripling over a decade, Colombia has become a bright star in the Latin American constellation

Colombia's economy glows bright engineering the future


www.eepcindia.org

LETTERS

IndianEngineeringExports ie 2

| Magazine of the Engineering Export Promotion Council VOL. 3, ISSUE NO. 5, AUGUST 2010

INTERNATIONAL EDITION EDITOR R Maitra Executive Director, EEPC India Printed and published by R Maitra, Executive Director, for and on behalf of the owner, EEPC India Vanijya Bhavan, 1st Floor International Trade Facilitation Centre 1/1 Wood Street Kolkata 700 016 Printed by Swapna Printing Works Pvt Ltd 52 Raja Rammohan Sarani Kolkata 700 009 Published from EEPC India Vanijya Bhavan, 1st Floor International Trade Facilitation Centre 1/1 Wood Street Kolkata 700 016 CONSULTING EDITOR Aditi Chowdhury Designed by Bee Ideas 20/3 Ballygunge Place Kolkata 700 019 info@beeideas.com Address all correspondence to the Consulting Editor email: editor@eepcindia.org The views expressed in the magazine are not necessarily those of EEPC India

EXCLUSIVE MEMBER SECTION AT http://www.eepcindia.org An exclusive member’s section has been introduced on EEPC India’s website. The User ID and Password has been sent to members on their email ID that is on record with EEPC India. If any member has not received it, please contact EEPC India at: eepc@eepcindia.org The email IDs of some members are not available with EEPC India. Please provide your email ID at eepc@eepcindia.org so that we can mail the details to you. It is also recommended that all members view their details in the Member’s Directory on EEPC India’s website and verify their email ID. All members are also requested to provide mobile numbers of key contact persons over email. This will enable EEPC India to send important alerts and messages on SMS.

INDIAN ENGINEERING EXPORTS

Biswajit Matilal, Asst Vice-President (PR and Advt), Birla

list, COO – all are to be legalised. Therefore, we have to send all documents together. Earlier the health certificate was issued from the Jadavpur University Food and Technology Department. However, the Iran Customs rejected it, as they need a certificate issued by any government authority like municipality, etc. That time FIEO had helped us to release the material to the customer at their port. Our Kolkata Corporation does not issue such certificates. So, we contacted Mumbai Municipality. We request you to take up the matter. We hope Government of India will understand our problem and we can continue a hasslefree business.

Corporation Limited, Kolkata

SUPARNA BANERJEE, Kolkata Closures Pvt Ltd, Kolkata

LEGALISATION OF DOCUMENTS

Ed replies: I understand the delays are creating considerable problems for your company to meet the buyer’s requirements. I shall be thankful if you could provide us a little more details, such as, 1. What is the Health Certificate called? Is it just called Health Certificate or are their any technical names? 2. If you are getting the Health Certificate issued by Mumbai Municipality, should it not be easier to get it certified again by the Iran Consulate in Mumbai rather than bring it back and then sending it to Hyderabad? 3. Is it possible for you to send a scanned copy of the certificate so that we can send it to Government of India and request them to get in touch with the Iranian Government to streamline the process. On receiving your comments, we will take up the matter at the appropriate level.

PROFESSIONAL APPROACH It is encouraging to receive the magazine, IndianEngineeringExports, regularly and I must appreciate visible improvements in the look and content of the publication. It is definitely a professional approach that has made this possible. I shall particularly refer to features like the ‘Member Section,’ ‘Calendar’ and ‘Book Review,’ which are, expectedly, readerfriendly. Also, the content page is not only colourful and inviting but offers, in a nutshell, the information inside. Wishing the magazine further glory and shall look forward to meeting you at a mutually convenient date and place.

This is regarding the legalisation of documents by the Iran consulate. I wish to know, do you have any channel through which we can shortcut the process of legalisation of the export documents? It is taking more than a month to complete the whole procedure. Usually we get the health certificate for our product from Mumbai Municipality within 15 days and then with other documents it has to be sent for legalisation to the Iran consulate in Mumbai, as there is no Iran consulate at Kolkata. Meanwhile, the materials reached before completion of documentation and our customer has to be paid the detention charge at their port. Please if you can send our documents through your organisation to add speed to the whole procedure, our customer would not have to pay the detention charge and we shall be ever grateful to you. The health certificate is a certificate which confirms that the packaging material is fit for food packaging. We do not have any people in Mumbai to send the documents to the Iran consulate. It is not only the health certificate, but Invoice, Packing

Please write in with your comments at editor@eepcindia.org or to The Consulting Editor EEPC India Vanijya Bhavan (1st Floor) International Trade Facilitation Centre 1/1 Wood Street, Kolkata 700 016, India

AUGUST 2010

3


in this issue

WORLDVIEW 35

COLOMBIA'S ECONOMY GLOWS BRIGHT Colombia has gradually resolved its problems to join the ‘emerging juggernauts’ of the global market with exports tripling over a decade to become a bright star in Latin America 6  SPOTLIGHT

30  MARKETS NEWS

Opportunity analysis of emerging sectors

Economies steadily picking up

EEPC India commissioned Ernst & Young to conduct a study to chart a growth path for exports from India from 2010-14 and to identify initiatives for the government. Extracts from the analysis of opportunities in manufacturing and exports

64  CALENDAR

24  EXPERTEYE

Resident and nonresident statuses An overview of resident and nonresident statuses from foreign exchange & taxation perspectives

5  MONTHLY MUSINGS

62  HOME AFFAIRS 66  EEPC INDIA OFFICES SPANISH SECTION I

Revisión trimestral de la economía – 2009

V

El empleo en la industria organizada: El sector ingeniero es el que más contribuye

VIII 

la crisis financiera global 

46  POLICY MATTERS

XII

Report of the task force on Goods & Services Tax – 6

XVIII 

4

AUGUST 2010

Un año después… Revisamos las raíces de

XX

Comercio de agua virtual – verdaderas preocupaciones Optimización del peso del hierro fundido Consumo energético en fundiciones de hierro

INDIAN ENGINEERING EXPORTS


monthly musings

From the Chairman’s Desk

T

he month of July brought news of revival of engineering exports. According to media reports, the Union Commerce Secretary, Dr Rahul Khullar, has informed that engineering exports in June 2010 has grown by 90 percent over June 2009. This implies that the export of engineering goods in June 2010 was to the tune of $5,168 million and is indeed a sign of pickup. This is because this growth is actually on top of not only the $2,720 million in June 2009 but, more significantly, over $4,135 million in June 2008. Thus, the revival is over and above the pre-crisis phase and not the one that was seen in the previous two months of the current fiscal when the growth was merely on account of a low base last fiscal. One would like to know where this growth has happened, the engineering sectors, the countries or regions and whether this is just a spike or is the beginning of an upward trend in the months ahead. I also checked the monthly export returns that the Council has so far received for the month of June 2010 from our members. The returns indicate a mixed trend with about 60 percent of the members filing their returns showing huge export growth largely as a result of a low base while the rest of the members are still showing very low negative growth numbers. So the average growth rate of our members’ exports is quite robust and in sync with the growth estimates projected by the Union Commerce Secretary. Be that as it may, I would still keep my fingers crossed and wait for a couple of months if not the full fiscal year to declare that the global recession is a thing of the past. This is because as we emerge out of nearly two years of global economic downturn, there are fears about the implications of an ‘exit strategy’ that many of the European governments are thinking of and some like United Kingdom have already begun to implement. Indeed, the lessons of the global economic crisis of the 1930s have to be kept in mind and countries around the world must be aware of the dangers of turning the tap off prematurely. The recent IMF forecast of positive growth rates in the major economies of the world and a forecast of 9.4 percent in 2010 for the Indian economy is most heartening. However, as a representative from the engineering industry and also a manufacturer exporter, I would be cautious about the trade buoyancy both in 2010 as well as in 2011. In this context, I must also draw your attention to the FICCI Export Survey of June 2010 and highlight some of the main findings of the survey. Respondents to the Survey said that after having seen an improve-

INDIAN ENGINEERING EXPORTS

ment in performance over the last few months, they have once again come under stress. Four factors are adversely affecting exports and exporters are showing signs of concern. These are: (i) the large-scale variation seen in the exchange rate; (ii) the evolving situation in Euro zone and attendant risk of slowdown in exports to that region; (iii) the rising cost of raw materials including the price of oil; and (iv) the expectation of a hike in interest cost once base rate mechanism is introduced. The large sideways movement in the value of the Rupee against the Dollar and Euro has led to severe problems. While the sudden appreciation in the value of the Rupee affected the margins adversely as it led to lower realisation for exporters, the recent decline in the value of the Rupee caught exporters off guard and they lost on account of forward contracts that were booked to hedge currency risk.

I would still keep my fingers crossed and wait for a couple of months if not the full fiscal year to declare that the global recession is a thing of the past. . . because there are fears about the implications of an ‘exit strategy’ that many of the European governments are thinking of . . . The evolving situation in Euro zone also does not inspire confidence. There are indications of buyers in the EU region going slow in placing their orders. There are also cases where Indian companies have been asked to hold back the dispatch of consignments. In a few other cases, Indian exporters have had to take temporary terminals for parking goods in the EU region as buyers have refused to accept immediate delivery. Clearly, therefore, we need the Indian Government to desist from a rollback of the stimulus measures for the exporting community just yet. EEPC India will be holding its trademark engineering show INDEE 2010 in Colombia in October 2010. This international edition of the magazine is, therefore, dedicated to Colombia and I hope that the participants at the exhibition will garner much information that have been meticulously put together in the following pages.

Aman Chadha

AUGUST 2010

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SPOTLIGHT EEPC INDIA-ERNST & YOUNG

Opportunity analysis of emerging sectors Engineering exports from India have grown considerably in the last few years but the share is still lower than other major India-like countries such as Brazil, China, Russia, Mexico and Thailand. This is a cause for concern as it indicates that India has not been able to fully exploit its multitude of advantages in terms of engineering skills, a burgeoning domestic market, an established raw material base and availability of a large pool of skilled labour. EEPC India, therefore, commissioned Ernst & Young to conduct a study to chart a growth path for engineering exports from India for the period 2010-14 and to identify initiatives that have to be undertaken by the government, EEPC India and the engineering exporters themselves to achieve the desired growth.


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

The study sets an achievable target of tripling India’s engineering exports by 2014 to reach a size of $110 billion, despite the current recessionary scenario. India’s recent growth trend and its current low share of world engineering exports, significant scope for improvement in the overall manufacturing competitiveness and the emerging consensus that the worst of the recession is behind us indicates that it is a distinctly achievable aspiration. Here we bring you extracts. More information on the 264-page publication – Engineering the future: An exports perspective: Strategy paper for the growth of engineering exports: 2010-14 – prepared by Ernst & Young for EEPC India is provided on page 19) Nuclear sector Sustained energy demand across the globe, coupled with the price volatility of crude, diminishing fossil fuel reserves, growing environmental concerns – especially related to greenhouse gas emissions – have compelled countries to explore alternate energy sources, both renewable and non-renewable, to propel growth. Nuclear energy has become one of the most promising alternatives to address this growing demand for energy. While nuclear energy has traditionally been utilised in the developed markets due to its potential to generate power quickly with low fuel, it has seen renewed interest across the world since 2007. This is on account of better economics and more reliable technology to manage environmental risk.

Nuclear energy: global scenario The constituents of the global energy mix have changed considerably over the past 30 years. Nuclear energy, in particular, has seen its share fall to account for only 6 percent of the total

global primary energy consumption as seen in Exhibit 1. The decline in the share of nuclear energy is predominantly due to the gradual fall in the share of nuclear power generation over the last decade, as nuclear power generation accounts for more than 90 percent of total nuclear energy usage. The historically low share of nuclear energy and its gradual decline is as much due to the higher capital costs associated with nuclear power generation as it was due to the restricted access of various countries to nuclear fuel and technology on account of proliferation concerns.

Existing global nuclear power scenario The share of nuclear power in world electricity production has declined in the past few years. However, it continues to be an important source of electricity for many countries, as it accounted for at least 25 percent of electricity generation for 16 countries in 2007. France leads the world with a 76 percent nuclear share of total generated electricity, followed by numerous other European and

Exhibit 1 Global primary energy supply, 2007

15.2

14.8

13.8

2,806

2,749

15.7

2,771

15.8

2,764

16.7

2,646

17.0

2,700

Nuclear 6%

16.8

2,655

Total = 11,099 mmtoe

2,583

Nuclear power generation (Twin) and share in power mix (%)

Hydro 6% Coal 24%

Oil 35%

Natural Gas 29% 2000 2001 2002 2003 2004 Source: BP Statistical review of world energy 2008

INDIAN ENGINEERING EXPORTS

2005 2006 2007

Nuclear power Share of nuclear power(%) Source: BP Statistical review of world energy 2008

CIS countries. In absolute terms, there are currently 439 operational nuclear power reactors across 30 countries, with a total capacity of 372.1 GW. The US leads with 104 nuclear power reactors, followed by France, Japan and Russia. Most countries with significant nuclear-generating capacities belong to the developed world, including the US, Japan and the EU. The developing countries of CIS, which had access to restricted nuclear fuel and technology also, have significant nuclear generating capacities. Major emerging economies such as China, India, South Africa and Mexico have comparatively small share of nuclear power in total power generation as seen in the Exhibit 2. However, countries such as India and China, which have high GDP growth and concomitant significant power requirements for the future, are looking at nuclear power to meet their electricity needs.

Global future nuclear power scenario Due to the inadequacy of other energy sources, nuclear power is receiving renewed thrust, which can be witnessed in terms of the large number of nuclear power reactors currently at the construction, planning and proposal stages. These nuclear reactors collectively total 374 GW, which is almost equivalent to the existing capacity. Exhibit 3 indicates that emerging countries such as China, India and Russia are at the forefront of new capacity addition, as they are driven by the need to secure future energy requirements to sustain rapid economic growth. In addition, developed economies such as the US, Japan and Korea have also

AUGUST 2010

7


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

Exhibit 2 Nuclear share in power generation, 2007 (%)

Top 10 nuclear producers, 2007 76.9

France

2

France

59

440.4

16.0

3

Japan

55

279.9

10.1

4

Russian Federation

31

159.8

5.8

5

South Korea

20

142.9

5.2

16

6

Germany

17

140.5

5.1

15.1

7

Canada

18

93.3

3.4

35.3 19.4

4.6 4.1 2.8

India

2.5

Pakistan

2.3

China

1.9

firmed up plans of increasing nuclear power generation capacities. It is important to note that these countries are also able to exploit nuclear energy as a source of power, as they have access, or have recently obtained (as in the case of India) access, to nuclear fuel and have requisite technologies in place.

Nuclear power: India In 2007, India had 17 nuclear power reactors with a total generating capacity of approximately 4.1 GW, up from 2.2 GW in 1998. The country generated 17.8 TWh of electricity from nuclear energy and ranked 18 globally in terms of electricity generated from nuclear power. However, total electricity generated has not been commensurate with India’s total generating capacity levels, as several of the country’s nuclear stations have been forced to operate at an extremely low plant load factor (PLF) due to the chronic shortage of nuclear fuel. The overall PLF of nuclear stations in the country has been consistently slipping in the past few years, from levels close to 90 percent in FY03 to below 50 percent in FY08.

Opportunities in Indian nuclear sector As a result of the India-US 123 agreement and the NSG waiver, coupled with the acute need

8

AUGUST 2010

30.9

54.1 48.1

USA

Brazil

848.9

USA

S.Korea

Netherlands

104

1

Ukraine

Mexico

Global share in generation (%)

54.3

Belgium

UK

Total generation (TWh)

Country

Slovakia

Russia

Number of units

Rank

64.4

Lithuania

8

Ukraine

15

92.5

3.4

9

Sweden

10

67.4

2.5

10

China

11

62.9

2.3

18

India

17

17.8

0.6

2,748.9

100

World total

Exhibit 3 Reactors under construction

Reactors planned

Reactors proposed 133

World 145 145

42

133

47

Capacity (MW)

Number

Country wise Capacity (MW) China Russia

India

Capacity (MW) China

8

India

5

Japan

5,980

S. Korea

Japan

Number 14,280 14

5,350 2,976 2,285

Number

37,460 21,500 17,915

Capacity (MW) China

23

Ukraine

27,000

20

13

USA

26,000

20

25,880

28

6

USA

11

Russia

2

Russia

9,360

8

Russia

9,450

7

Italy

13,800

Number

35

France

1,630

1

S. Korea

Finland

1,600

1

S. Africa

3,565

3

UAE

Canada

1,500

2

UAE

4,500

3

Poland

72,000

20,000

80

15

17,000

10

15,500

11

10,000

5

Source: World Nuclear Association

for reliable power supply in the country, the Planning Commission has renewed thrust on setting up Greenfield nuclear plants to meet the burgeoning demand for power in India. The commission aims to expand the nation’s nuclear power capacity to 63,000 MW by 2032, and as many as 30 new nuclear power

plants to be built by 2020. Plans are already afoot to increase the generating capacity by around 3.8 GW in 2008-12, which will take the share of nuclear power to above 3 percent by 2012. In addition, the deals will improve the utilisation of India’s existing nuclear plants by supplying them

INDIAN ENGINEERING EXPORTS


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

with fuel, the lack of which has resulted in a PLF of less than 50 percent. The industry is anticipating opportunities worth $100 billion over the next 20 years on account of this major expansion plan.

Opportunity sizing for 2010-14 While the long-term growth potential of the nuclear power industry is significant, immediate business opportunities in this sector in the next few years (2010-14) are expected to be on a slightly lower scale, as India is taking a stepped approach to generating power by nuclear energy. As a result, the industry is expected to begin with a capacity addition of 12,000 MW between 2012 and 2017 followed by significantly higher capacity additions in subsequent Five-Year Plan periods. However, it must be noted that the proposed addition of 12,000 MW is almost twice the size of the current nuclear capacity. As such, it is considered to be a major opportunity for all nuclear power plant suppliers.

Potential $15-billion opportunity in next five years To gauge the degree of opportunity in nuclear power generation, the capacity additions being planned need to be identified. It is known that India is adding 3,380 MW between 2008-12 and plans to add 12,000 MW in 2012-17. As nuclear power plant projects have a longer gestation period, the addition of 12,000 MW is expected to directly lead to various opportunities over 2010-14. The various opportunities that are likely to arise due to capacity additions in nuclear power generation projects can be categorised under the following key heads: • Boiler-turbine-generator (BTG) • Engineering procurement and construction (EPC) • Reactor • Balance of plant (BoP)

Outlook Opportunities worth $15 billion are likely to

arise from orders for 12,000-MW planned nuclear projects in the next five years. All of these capacity additions are expected to come through government-owned entities such as the NPCIL. Private-sector participation in nuclear power generation has not been fully allowed, and is likely to come only through joint ventures with NPCIL, where the NPCIL will hold a stake of at least 51 percent. Private players such as Reliance, Larsen & Toubro (L&T) and GMR have already expressed interest in setting up nuclear power plants, but the roadmap toward public-private partnership (PPP) or the privatisation of nuclear power generation has not yet been elaborated. However, nuclear generation investments will lead to huge opportunities for government and other domestic/foreign equipment manufacturers and service providers, which will cater to the setup of nuclear power generation capacities. A number of engineering companies, both foreign and domestic, can exploit these oppor-


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

tunities. Approximately 40 Indian companies have already announced plans to cater to India’s nuclear power generation requirements. The beneficiaries of these opportunities can be classified on the basis of two parameters: • Country of origin: domestic and foreign opportunity • Level of players: tier 1 and tier 2 opportunities

Domestic and foreign opportunity Both domestic and foreign companies can be beneficiaries of the $15-billion total nuclear opportunity. It is expected that domestic companies will be able to address almost 61 percent of the total opportunity. This is due to the fact that the EPC and BoP shares of all projects accounting for approximately 40 percent can be addressed by domestic companies due to their prior experience. In addition, domestic companies can hope to address 50 percent of BTG orders based on the government have stated intention to indigenise. For the reactor segment, it is expected that foreign companies will address a major share (around 80 percent) of the opportunity, as domestic companies do not have any experience in manufacturing reactors of more than 1,000 MW. The remaining 20 percent is expected to be addressed by domestic companies that will act as suppliers of various components such as forgings. As a result foreign companies will get to address approximately 39 percent of the $15-billion opportunity.

Tier 1 and 2 opportunities Tier 2 opportunities will comprise a fraction of the value of the entire equipment and services order, as it will only include players who will take sub-contracted orders from tier-1 players under each of the categories. As a result, there will be large number of existing and future engineering players (including SMEs), which will be able to capitalise on the tier-2 opportunity. Tier 1 opportunities will comprise the entire value of the equipment and services order, as

10

AUGUST 2010

it includes only those players who will take direct orders for BTG, EPC, Reactors and BoP. As a result, only a handful of specialised players with significant prior experience in these categories can exploit this opportunity.

Export opportunities As a result of prolonged nuclear isolation, India has not been able to optimise its indigenous research in the field of nuclear energy. This, in turn, led to a limited domestic nuclear power generation capacity. The limited domestic market has, in turn, not allowed Indian equipment manufacturers to gain the vital experience required to become competitive in terms of cost and quality vis-àvis other international manufacturers, thereby hampering India’s export potential in the nuclear power space. However, India can utilise its indigenous research on smaller reactors as well the anticipated big leap in nuclear power generation to export certain nuclear power equipment. 220-MW reactors: India has indigenously developed smaller 220-MW rated reactors and associated BTG equipment. These are operational in 12 units across India. As a result, India is the only country with the technology, design and infrastructure for the manufacture of commercially proven 220-MW reactors. Significantly for India, smaller units have seen a revival due to their capital costs, because smaller reactors (less than 500 MW) are more simply designed and offer the advantages of mass production economies and reduced site costs. Interest in 220-MW reactors comes mainly from countries with comparatively low energy requirements such as Indonesia, South Africa, Thailand, Vietnam and Bangladesh. These countries account for almost 10 percent of the proposed nuclear capacity addition. As such, they can serve as export markets for the indigenously developed 220-MW reactors. Nuclear components: Castings and forgings used in reactors/turbines: India is on a significant nuclear power expansion drive, with the stated goal of attaining indigenisation levels of up to 80 percent in the next few years.

As a result, a number of Indian companies such as L&T, Bharat Forge and BHEL have established JVs with foreign suppliers of reactors and BTG sets to locally manufacture some of the components used in higher-rated reactors (above 1,000 MW) and BTG sets that have been chosen for the next phase of nuclear power expansion in the country. As these higher-rated reactors and BTG sets are also preferred in most of the demand-generating countries such as China, Russia, US and Korea, these companies can leverage the increase in domestic manufacturing scales and India’s low-cost advantage to achieve exports of nuclear components across the various large target markets.

Recommendations for Government • The Indian Atomic Energy Act should be amended to allow private participation as it is next to impossible for the government alone to meet the ambitious nuclear power generation targets. In addition private participation has to be facilitated by means of a comprehensive public-private nuclear strategy detailing the model for participation (negotiated or competitive bidding route), level of participation in the nuclear cycle, civil nuclear liability and a regulatory framework. An optimum regulatory framework would be one that ensures a smooth juxtaposition of the role of government as a safety oversight body coupled with its new role as a commercial regulator for private sector in the civil nuclear programme. • Facilitate the entry of domestic private equipment suppliers by instituting a Civil Nuclear Liability Limitation Act, which would restrict the liability of various equipment suppliers in case of a nuclear accident. • An Indian Civil Nuclear Code should be created to standardise nuclear equipment and its components. This standardisation needs to be based on the best practices of existing systems across the world in order to create a culture of quality as well as ensure fundability of Indian products to capitalise on possible export opportunities. Some

INDIAN ENGINEERING EXPORTS


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

Defence sector Global defence scenario In 2008, the global military expenditure was estimated to be $1464 billion. This represents an increase of 4 percent in real terms compared to 2007, and 45 percent since 1999. Military expenditure constituted almost 2.4 percent of global gross domestic product (GDP) in 2008. The US is the principal determinant of the current world trend and its military expenditure now accounts for almost half of the world’s total. There is also a trend of increasing concentration of military expenditure, i.e. a small number of countries account for the largest share of global military expenditure. The top 15 defence spending countries account for 83 percent of the total expenditure with the US accounting for approximately 45 percent of the global total, distantly followed by the UK, China, France, and Japan, each with 4-5 percent of the global share. The defence spending of all countries is driven by certain imperatives of foreign policy objectives, real or perceived threats, armed conflict and policies to contribute to multilateral peacekeeping operations, which are in turn determined by the economic situation of the countries.

India: defence scenario India is among the top 10 nations in the world

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AUGUST 2010

Exhibit 4: Military expenditure, 2008 USD billion

59.7

58.3

53.6

UK

China

France

*Without USA

43.6 Japan

36.9

35.4

33.8

33.1

24.1

22.6

Germany

Russia

S. Arabia

Italy

India

S. Korea

Military expenditure

Source: Ministry expenditure

in terms of military expenditure (Exhibit 4). The cumulative defence budget (capital plus revenue expenditure) has grown at a CAGR of 11.5 percent between FY06 and FY09 to $26.5 billion for FY09. With heightened terrorist activity in recent times, India’s geostrategic location and surrounding environment, the government is now focusing on providing modern combat equipment to the police and armed forces. Increased tension with the neighbouring countries is driving the procurement of latest weapons and technologies. In light of these issues, India’s defence sector is expected to remain a significant spender. It has fast emerged as an attractive investment destination for foreign and indigenous defence players due a series of measures introduced by the MoD to enhance the level of transparency and accountability in the defence acquisition and procurement process. Defence planning system in India is controlled by the Ministry of Defence (MoD), as it is the central coordinating body for defence production and R&D. A number of departments and organisations with interests central or supplementary to the entire defence spectrum in India report to the MoD. Among these, the main departments associated with defence production are the Defence Acquisition Organisation (DAO), the Department of Defence Production (DDP) and the Defence Research and Development Organisation (DRDO). The DAO mainly takes care of the import requirements while DDP takes care of the production within India with DRDO playing the role of technology facilitator for DDP. DDP in turn has DGOF, DPSU’s and DGQA

reporting to it. Most of the domestic defence requirements were met to a large extent by DGOF and DPSUs. There is no competitive bidding for these procurements from DGOF and DPSUs and are based on four yearly production programmes and a long-term production forecast. As a result of the continued increase in defence expenditure, the total value of production from DDP has risen at a CAGR of 10.3 percent from INR164.2 billion in FY04 to INR220.5 billion in FY07. During FY08 (April-November), the total value of production reached INR94.3 billion. Within DDP, Exhibit 5 shows that the share of DGOF in total production has declined from 39.7 percent in FY04 to 32.3 percent in FY08, while the share of DPSUs has increased from 60.3 percent to 67.7 percent, during the same period.

Exhibit 5: DDP production contribution, by organisation (%) FY 08*

32.3

67.7

94.3

FY 07

28.1

71.9

220.5

FY 06

34.6

65.4

199.2

FY 05

35.5

64.5

174.4

FY 04

39.7

60.3

164.2

CAGR

examples of the code used for nuclear equipment in various part of the world are US and Canada – ASME (NRC-8), Europe – N-PED (RCC-M), Russia – GOST, Japan – JSME and South Africa – NNR. • The Indian Atomic Energy Act should be amended to allow higher levels of private participation, as the current laws prevent majority ownership in nuclear power projects by private players. • A time-bound comprehensive licensing mechanism has to be initiated to set up nuclear installations. It should also include decisive clauses on the vital but time-consuming procedures relating to environmental compliance to avoid delays.

10.3%

DGOF

DPSU

*Up to November 2008 Source: Ministry of Defence

INDIAN ENGINEERING EXPORTS


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

Defence production challenges in India

Exhibit 6

The defence production sector in India has not fully evolved despite a long history of defence expenditure and significant production experience. This lack of evolution has become apparent due to some of the following issues: • Inefficient production: The present system of defence production is plagued with a number of problems, which include a) spillover production, b) underutilisation of capacity and c) excessive overheads and inventories. • Limited success of indigenisation initiatives: A detailed examination of the indigenisation figures reveal that only mature or obsolete designs are produced by the DPSU’s under license/technology transfer. As per details giventotheParliamentaryStandingCommittee on Defence, HAL has achieved 70-75 percent indigenisation and BEL has indigenisation of over 60 percent. Indirectly, that means that practically even for products with a history of manufacturing in India, it is still dependent on global OEMs to the extent of 25-40 percent. The continued dependence on foreign collaborators for updated designs even after several years of license agreements indicates ineffectiveness of the indigenisation initiatives. • Low level of exports: India performs abysmally in the area of defence exports and is it constitutes, at an average 1.5-2.5 percent of total production; 3 percent for the DPSUs revenues and 1 percent for the DGOF revenues. As a result, the Indian defence industry’s importexport ratio is inferior to countries with even smaller defence industrial infrastructure as seen in Exhibit 6. The lack of technology and competitive pricing; the existence of a negative list of countries where the exports of defence equipment cannot be explored; the large number of clearances required and stipulation of ‘End Use Certificate’ and lack of thrust on marketing efforts are a few major reasons for the low level of defence exports from India.

Indian Export Imports, USD million

Important trends in Indian defence sector In order to mitigate some of these problems

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AUGUST 2010

Export-Import ratio, 2001-04

2.305 1,175 1,414

Imports (In USD million)

Exports (In USD million)

Export Import ratio

USA

8,526

44

194.1

Israel

1,675

1,290

1.3:1

South Korea

2,755

313

8.8:1

Singapore

1,441

73

19.7:1

1,445

1,847

26

13

14

21

1

2004

2005

2006

2007

2008

Export

Country

Source: SIPRI Database, 2005

Import

Larsen & Toubro’s success in the defence sector The launch of the country’s first indigenous nuclear-powered submarine, INS Arihant, is an excellent example of productive public private partnership in the defence sector. A number of companies, including the leading engineering player, Larsen &Toubro, were part of the project along with DRDO. L&T was the single largest contributor in the project, involved from the plate cutting stage to the final launch. With the launch of INS Arihant, India has become a part of an elite group consisting of only the US, Russia, the UK, France and China. L&T got the project to build part of the vessel as it offered a lower bid than the government. The firm’s higher operational efficiency and productivity levels were major factors in reducing the bid costs. L&T has been a supplier to India’s defence sector since the late 1960s. The company plans to leverage its decades of experience to capture a major share of the domestic defence market. L&T’s licence to manufacture warships, submarines, weapon platforms and high-speed motor crafts is one of the first six issued to private companies for manufacture of defence equipment after this sector was opened up to private participation in 2002. The company has formed a JV with EADS Defence and Security, Europe’s largest defence equipment maker, to acquire technical expertise required to tap the Indian defence market. L&T has also formed alliances with three major nuclear reactor manufacturers including, Russia-based Atomstroyexport, US-based Toshiba Westinghouse and Canada-based Atomic Energy. The company is constantly looking for more alliances with companies such as US-based General Electric Hitachi and France-based Areva. Unlike other players, L&T’s business strategy is not based on project-specific tie-ups of convenience with foreign defence majors. The company sees itself as having covered the learning curve over decades and now intends to use its own experience and expertise to the hilt. Over the years, it has also become a one-stop integrator, which today is the key differentiator for the company.

Government of India has taken a number of steps aimed at altering the dynamics of the Indian defence industry to make it more efficient, competitive and self sufficient. • Private sector participation: In addition to the imperatives mentioned above, the capital intensive nature of the defence industry as well as the need to infuse foreign technology have led the government to facilitate greater levels of private sector participation in the area of defence goods production by allowing private sector participation with up to 100 percent of equity and with permissible FDI of up to 26 percent, both subject to licensing restrictions of 2001. This move has led to

many large domestic industries investing both in R&D and infrastructure to develop capabilities in defence production as well as to assume the role of system integrators. However, the anticipated FDI flow was not realised as foreign companies were averse to investing in any companies where they lack significant control. While the above ruling did allow complete private sector participation, the DDP had already kick-started the private sector participation by outsourcing a large percentage of sub-systems and components of main equipment to private players including many in the SME sector (Exhibit 7). The outsourc-

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Exhibit 7: DGOF procurement FY2004-08 (INR billion) Year

Value of issue

Indigenous purchase (% of total issue)

Indigenous purchase breakdown (% of total issue)

Imports (% of total issue)

Total purchase*

Government sector

SSI

Private sector

FY04

65.0

25.5 (39.1%)

6.1 (9.3%)

6.2 (9.5%)

13.2 (20.4%)

12.1 (18.6%)

37.6

FY05

61.8

27.4 (44.2%)

5.6 (9.1%)

7.6 (12.3%)

14.1 (22.8%)

4.8 (7.8%)

32.2

FY06

68.9

31.0 (45.0%)

FY07

62.3

27.4 (44.0%)

6.5 (9.4%)

8.5 (12.4%)

16.6 (24.1%)

5.1 (7.4%)

36.8

6.3 (22.8%)

10.4 (38.0%)

10.8 (39.2%)

4.4 (15.9%)

31.8

FY08

70.0

FY09

76.7

32.1 (45.9%)

7.6 (23.6%)

13.5 (42.1%)

11.0 (34.2%)

7.9 (24.7%)

40.1

35.3 (45.9%)

8.1 (23.0%)

14.5 (41.1%)

12.7 (35.9%)

7.5 (21.3%)

42.8

* Total purchase is invariably less than the total value of issue depending on the viability of RFPs Source: DGOF

Exhibit 8: Impact of indigenisation Reduction on foreign dependence(%)

Incremental increase per annum (INR billion)

Acceleration in manufacturing GDP growth

Additional jobs

25

85

8%

120,000

50

111

11%

150,000

75

142

14%

200,000

Source: RBIdata from Dr Kelkar Committee Report

ing had been possible because of the recent technological advances in the private sector coupled with relative cost savings that it brought. In addition, some of the low technology and commonly used items are being procured from the SME sector, which is capable of producing adequate quantities of these products. There are more than 5,000 companies supplying around 20-25 percent of components and sub-assemblies to DPSU. • Offset clause: India had for long sourced almost 70 percent of the defence requirements from imports. These high levels of imports put India in a disadvantageous position on two counts: a) it had massive foreign exchange outgo; and 2) it also had huge opportunity cost in terms of the employment levels and productivity increases in the domestic industry. For example, it has been concluded that a mere 25 percent reduction on foreign dependence on defence imports, will save the foreign exchange outgo by INR85 billion, accelerate manufacturing GDP growth by 8 percent and create


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

120,000 fresh jobs. Exhibit 8 shows the impact for further reduction in foreign dependence. In order to counter these issues, a defence offset policy was first promulgated in 2005 and has been subsequently revised in 2006 and 2008. The offset policy requires the foreign exporter to ensure at least a certain percentage of the value of the contracts to come from Indian entities either through sourcing of products or investment in the R&D of the domestic companies. The revised offset policy states that there should be a minimum 30 percent offset requirements in defence imports of Rs300 crore or more and has also added a provision of offset banking, besides enlisting a number of categories of defence products. As a result of these initiatives, Government of India is looking to enhance domestic industrial capability through foreign participation. For example, OEMs for the aerospace and defence sectors are shifting their focus to design and systems integration and have outsourced the manufacturing to Indian entities (Exhibit 9).India has already inked a number of offset agreements with various vendors and these agreements are expected to contribute to reduction in the import bills as well improve the competitiveness of the Indian defence sector.

SME sector outlook India aims to facilitate greater SME participation in the area of defence goods production. Currently there are more than 5,000 companies supplying around 20-25 percent of components and sub-assemblies to state-owned companies. However, the share of SME in defence production is set to increase in the next couple of years on the back of rising defence expenditure, which is magnified by the offset policy, especially in communications and IT equipment. The current defence market for private sector firms in India, which includes outsourcing from DPSUs and OFs, is estimated to be $700 million and is expected to further increase, driven by determination of the government to increase private sector participation.

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AUGUST 2010

Exhibit 9: Spread of offset agreements By entity

By entity PSU 38%

Large scale private companies 37%

SME 25%

Source: India Regional Offset Conference 2009

• The recent revision of the offset policy has mandated that the offsets (domestic) partner is not required to hold MoD licence anymore. This has increased the scope manifold from 37 to 2,000 sub-industries, which can now consider associating with the offset programmes. This increase will help the SME sector as a number of these industries are SME-centric and they can realise the potential for high growth with a foreign partner. • Government of India and the Foreign Investment Promotion Board approved India Rising Fund, a first of its kind venture fund for SMEs making defence equipment in 2008. India Rising Fund plans to raise INR750 million with INR550 million from international investors and the rest from the domestic market. The fund plans to funnel its corpus into promising defence SMEs, providing the capital needed to build up their manufacturing infrastructure and delivery capability. It plans to actively participate in the management of the companies, in which it invests, bringing in professional practices and processes. It plans to invest 90 percent of its capital into defence manufacturing, and about 10 percent into defence R&D units that are working in the fields of data fusion, thermal imaging and sensors.

Opportunity sizing for 2010-14 As a result of Government’s initiatives, India’s defence sector budget is expected to grow at a rate of 8 percent till 2014, with an anticipated capital budget share of 45 percent, which includes procurement of aircraft and aerospace equipment such as, heavy and medium armament systems, vehicles, plat-

Manufacturing 46%

Others 18% Services 3% Engineering 11%

Software 7%

Design 15%

Source: India Regional Offset Conference 2009

forms and naval vessels among others. The remaining 55 percent is accounted by revenue expenditure, which caters to the operating expenditure of the three Services (Air, Army and Navy) and other departments for spares, stores, fuel, etc. It is estimated that ~17 percent of the revenue expenditure (~9 percent of total defence budget) will go toward spare part manufacturing. Thus the total manufacturing opportunity in defence is ~54 percent arising from capital budget (45 percent) and 9 percent revenue budget translating into a market of approximately $91 billion for the period 2010-14 with individual year spread.

Potential $91 billion opportunity in next 5 years Out of this, based on the past trends and the after figuring the impact of offset deals, the opportunity size for domestic companies will be $42 billion for the period 2010-14 accounting for 46 percent of the total opportunity size. It is expected to be $7.1 billion in 2010 and grow by 6.9 percent over the period. The opportunity for foreign companies will account for the remaining 54 percent. The share of private domestic companies and specifically SMEs among them has been on an upswing in the recent years. It is estimated that private companies as a whole will address 27 percent of the total domestic opportunity and the SMEs should be able to address 40 percent of the private player opportunity. This translates into a significant business opportunity of ~$11 billion for private players and ~ $ 5 billion opportunities for SMEs over the period of 2010-14.

INDIAN ENGINEERING EXPORTS


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

Exhibit 10: Engineering services value chain Product conceptualization

Product design and modeling

Engineering analysis

• Conceptualizing product’s functionality • Benchmarking –process, product and cost • Designing the product‘s aesthetics and usability • Prelim-design analysis, market research and simulation

• Complete product design • Design of components using CAD, Pro E, 3D modeling, automation and conversion between platforms

• Simulations of designs to study a part, sub system or system • Performance optimization

Product realization

Product support

• CMM/CNC programming • Forgings, castings and fabrication engineering • Manufacture of jig, fixtures and support equipment

• Technical and design support • Conversion of GIS and legacy document • Re-engineering and reverse engineering • Maintenance manuals, part catalogues and service bulletins

Complexity

Level of offshoring

Outlook The budgetary provisions and market size are strong incentive for the foreign OEMs to pitch in and help the domestic defence industry to realise the $42 billion opportunity. The opportunity is expected to mostly follow the breakup of capital expenditure in defence – Air Defence 30 percent; land and naval system modernisation and upgrades 15 percent each; R&D 10 percent and C4ISR*, the new thrust area, will absorb 5 percent. The remaining 30 percent is earmarked for other supplies, e.g. ammunition and other systems. As a result of the offset agreements, a number of industry segments, where India has negligible presence, are expected to gain traction in the future.

Civil aviation In addition to the proposed defence procurements, offsets against procurement of Indian Airways and Air India are also expected to generate substantial business for the Indian vendors. The State Trading Corporation (STC) is the nodal agency to deal with offset relating to major purchases on behalf of civil aviation. Airbus and Boeing have orders for 43 and 68 aircraft, respectively. The total value of offset at 50 percent is targeted at $360 million. According to the terms of agreement between Airbus and STC, 50 percent of the total offset obligation of the Airbus will be utilised in aerospace areas such as aircraft components design, engineering and data management

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AUGUST 2010

High

Medium

Low

services, technical publication services, raw material and semi-finished products. The offset provisions in civil aviation are likely to create an annual business worth $100 million per year for the aerospace SMEs.

Recommendations • FDI in defence has to be increased from the present 26 percent to around 49 percent. This is because the 26 percent rule has not been able to attract significant FDI since 2001. Any hopes of forcing FDI through the mandatory offset arrangement is unlikely to succeed as the foreign firms have nothing substantial to gain from an equity participation of only 26 percent. It has been observed, from the examples of other countries, that by allowing foreign firms to take a substantial stake, they are more likely to transfer technology and outsource production to the domestic industry. • The Ministry of Defence (MoD) should come out with a short term procurement plan on a regular basis as it will help the domestic private firms in adequately preparing themselves by means of Finalising domestic/foreign collaborators; Raising sufficient amount of funds. This will help the domestic private sector realise its anticipated potential. • Currently the offsets policy is applicable to any procurement that is above INR300 crore in values. This threshold value for offsets is comparatively high and as a result, only a handful of domestic players will be able to

utilise it. The threshold for offset should be reduced to INR75 crore in line with what is practiced in other countries to ensure participation from a larger breadth of the domestic industry. • Banked offsets clause, which has been recently introduced, has a maximum tenure of two and a half years, this is too less to make the provision attractive for foreign companies. As a result, Government should look at increasing it to around 5 years.

Engineering services Engineering services – defined as services to augment or manage processes related not only with the creation of products/service but also the lifecycle associated with the product or service – include design of the product as well as the infrastructure, equipment and the processes used to manufacture or deliver them. Exhibit 10 describes them in detail. Currently, offshoring of engineering services only constitute a small percentage of the total demand for engineering services globally.

Global engineering services market Global engineering services market, estimated at $886 billion in 2008, has been growing at 2.9 percent y-o-y from 2007. The US, Japan, Germany, France and the UK are the leading spenders in the engineering services segment. While developing economies such as Thailand, Malaysia and Singapore are emerging as a

INDIAN ENGINEERING EXPORTS


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

potential destination for engineering services, only 9 percent (or $80 billion) of the total demand came from the low-cost countries. With increasing globalisation of engineering and R&D activities, there has been a rise in the trend of companies conducting development activities outside their base country. The factors driving the engineering services outsourcing include a) cost reduction, b) improved efficiency, c) reduced time to market, d) access to new markets, e) domain capabilities and f) meeting local requirements. The off-shored business to low-cost countries, however, stood at only $30 billion in 2008 (Exhibit 11). India leads the engineering services outsourcing market among the low-cost countries, followed by Mexico, Russia, China, Brazil, Poland and Thailand. The share of engineering services off-shored to total engineering services is expected to increase continuously as companies look for new markets and cost savings. The global offshore engineering spend is expected to grow at a CAGR of around 25 percent over 2008-15 to reach $145 billion by 2015. By 2020, this market is expected to be close to $300 billion, amounting to almost 25 percent of all engineering services activity. Hi-tech/telecom, automotive and aerospace sectors, dominated the global engineering outsourcing. With rising technological intensity in the products used by these sectors, their spend on technology for R&D and engineering is expected to rise further. Other sectors including construction and utilities also offer significant global opportunities, which can be exploited through developing a higher technological prowess in the given domain. Rising globalisation is driving players in the engineering sector to locate their offices and R&D site across the globe. This offers an opportunity to countries such as India to offer engineering services. Growing number of captives in the country are also contributing to the development of a global skill base in the country, which it can leverage in the long run. Most global players are giving importance

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AUGUST 2010

Exhibit 11 Worldwide engineering spend, 2008

Total offshorable engineering exports, 2008

Total = USD886 billion

Total = USD30 billion China 9%

Row 4%

India 16%

Europe 33%

Japan 21%

North America 42%

Mexico 12%

Other 29%

Poland 7% Brazil 10%

Thailand 5% Source: Nasscom

Russia 12%

Source: Nasscom

Exhibit 12 Sector wise engineering services exports and offshore product development

Engineering services offshoring USD billion

3.55

4.27

Sofware platforms / systems 10%

4.91

Semicoductor / EDA 18% Telecom / networking 27%

Enterprise softeare products 16% 0.90

1.10

1.30

FY07

FY08

FY09E

Engineering services Offshore product development Source: Nasscom

to India in their expansion plans. Apart from serving as a manufacturing/outsourcing destination, the nation is also finding acceptance as a favoured R&D destination, benefitting from the availability of low-cost skilled and educated manpower and proven product development capabilities. Frugal engineering, showcased in Nano, is a leading example of India’s increasing R&D capabilities.

Indian engineering services outsourcing market The Indian engineering services exports are estimated to be worth $4.9 billion in FY09. The industry grew at a CAGR of 17.6 percent over the period FY07-09. Factors including quality of talent available in the country, reduced time to market, low-cost and the access to local market have driven growth in the segment. The growth has also been driven by increased focus on R&D and product design by domestic companies as well as MNCs setting up their captive centres.

Consumer software products 1%

Computing systems 3%

Consumer electronics 11%

Manufacturing 14%

Source: Nasscom

Offshore product development includes software development services sourced by global companies for product development through their captives or third-party providers: • With the total market share of India expected to increase in the future because of certain sustainable advantages, the Indian engineering exports sector has the potential to reach $29 billion in 2015, with a 20 percent share of the world market. • The total engineering services opportunity for the period 2009-14 is expected to be tune of ~ $62 billion. Of the total engineering services market, automotive sector accounts for 19 percent, aerospace 8 percent, utilities 3 percent and telecom the largest share of 30 percent. • Indian IT service companies serve 55 percent of the market, captives serve around 40 percent, and niche players comprise the remaining engineering services market. It is expected that the share of captive centres will increase further in the next few years due to

INDIAN ENGINEERING EXPORTS


SPOTLIGHT EEPC INDIA-ERNST & YOUNG

Exhibit 13: Emerging trends in engineering services Region wise

Activity wise

2004

2020

US

2004

69

60

SD S&T

EU

17

2020 42.7% 14.5%

15 MRO

Asia

12

2

Total= USD131 billion Source: Nasscom

1

India remains a medium technology provider Though India is considered to be a major destination for engineering services outsourcing, it is observed that domestic players still lack the expertise in high-end areas such as developing prototype, which require large amount of domain experience in analysis and testing. As risks involved in offshoring complex services are high, significant number of players offer low to medium-end engineering services. • Indian players are however, gradually moving up the value chain. With the development of the world’s cheapest car and other low-cost products, India has showcased its potential to provide solutions involving high engineering complexity, especially in the automotive

AUGUST 2010

CD

Total= USD220-240 billion

increase in new investments in the country to cater to the various opportunities. • Each type of service provider has a different value proposition based on its strengths. While a captive centre will be able to best manage sensitive information pertaining to the services, an IT /engineering company would have the skill to provide solutions from product design to prototyping across horizontals and multiple industries, a pure play engineering services player would have the ability to capture opportunities and deliver an end-to-end mechanical solution in particular domains.

22

14.5%

19.8%

19.5% SD: System development S&T Science and technology MRO: Maintenance and repair MS: Management support CD: Component development

24 MS

RoW

43.2%

7.6% 16.0%

Total= USD131 billion

and aerospace sectors. • A few niche/third-party players have emerged, who are offering high-end services and are trying to improve their domain expertise to expand the customer base.

Outlook On the back of India’s strength in the engineering domain and ability to adapt to new emerging opportunities, it is estimated that engineering services will be worth $29 billion by 2015. This is likely to increase India’s share of world offshore engineering spend to 20 percent from the current 16 percent. Sectors such as Defence, Aerospace, Telecom, etc. are likely to drive the growth in the future. Cost advantage is driving the outsourcing of product designs and upgrades, and it is expected that global players will increase the outsourcing of engineering services to India due to its cost advantages. It is also expected that Indian engineering services industry will evolve in future to move beyond its current product portfolio and become a design services hub of the world (Exhibit 13). Also, with higher level of electronics components in hi-tech/telecom as well as automotive and aerospace, the in-vehicle electronics and avionics areas are expected to account for a large portion of the expenditure. Given India’s poll position amongst low-cost countries in software services, it can by extension utilise its skill sets to play a role of a leader

7.3% 15.9%

Total= USD220-240 billion

in this space. The defence sector offers a long-term potential for the engineering services outsourcing segment. By 2020, Asia’s share in the global defence R&D spend is expected to be double due to increased R&D spend by the developing countries such as India and China.

Recommendations • The industry players, the education institutions and Government need to participate actively to develop the necessary skills (domain and sub-domain knowledge, design tools, engineering standards, project management skills and engineering fundamentals) among the graduating engineers. • In order to boost engineering services exports, Government can look to create specialised engineering parks in the country on the lines of software technology parks to accelerate investments in the sector. • India should increase its visibility by making industry representations, structured marketing and create awareness about the capabilities of service providers along with successful case studies to enhance the growth of the engineering services outsourcing industry. The industry should also initiate the mapping of all the existing industry players, their service offerings and domain expertise. • The IPR and data protection laws in the country should be further strengthened to instil greater confidence in foreign investors.

INDIAN ENGINEERING EXPORTS


Resident and non-resident statuses EXPERTEYE T R SHASTRI Prof. Shastri is Dean, ICICI Manipal Academy, Bangalore

S

hakespeare ponders in Hamlet, ‘to be or not to be’ as an important question, literally one of ‘life and death.’ It also implies that ‘to be’ is different from ‘not to be’ and only one situation is possible at a time. If earth and heaven are considered as two different spaces, a person resident at one place is a non-resident at another place and vice versa. After all, a person cannot be alive and dead simultaneously! Though the word resident is derived from the word reside, whose

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AUGUST 2010

An overview of the resident and non-resident statuses from foreign exchange and taxation perspectives dictionary meaning is one who resides or dwells at that place for some time, the word ‘resident’ has been defined differently under different legislations. Thus, we have situations where a person is resident from literal or dictionary meaning but non-resident as per law. A foreigner who is literally residing in India on a short visit say for tourism can open a non-resident (ordinary) account, though he is dwelling just in front of the branch. We can have a situation where a per-

son is resident from foreign exchange angle but non-resident from taxation perspective and vice versa. In fact, the Income Tax Act gives scope for one more category of person called Resident but Not Ordinarily Resident (RNOR). We try to understand here the concepts of resident and non-resident status, its significance in the normal business situations and pros and cons of this status. The focus here will be more from foreign exchange (i.e. as per Foreign Exchange Management Act

INDIAN ENGINEERING EXPORTS


EXPERTEYE T R SHASTRI

1999) and not taxation angle. The concept of nationality or citizenship or ‘foreign’ or ‘Indian’ is different from the resident and non-resident statuses. Nationality in case of an individual essentially means certain economic benefits including right to reside, get a job & benefits bestowed by the government and political rights including that to hold a passport or to vote. In case of non-individual like a company, it is considered Indian or foreign from different perspectives. FEMA does not even define the words like foreigner, nationality or citizenship because these have significance from political angle and not financial sense. The concept of nationality and resident are independent. In other words, there can be a foreigner but resident, non-resident Indian, etc.

Resident status from foreign exchange angle FEMA first provides an inclusive definition of the term ‘person’ as an entity including an individual, HUF, a company, a firm (like partnership or proprietory), any type of incorporated or unincorporated association of persons or individuals and any other artificial juridical person not so specifically mentioned. It includes any agency, office or branch owned or controlled by such person. Then FEMA proceeds to define how to classify such ‘person’ into resident and non-resident status. It elaborately defines who is a resident in India and then declares all others as non-residents in India. In case of non-individuals, resident status in India is given if it is a body corporate registered or incorporated in India or if it is an office, branch or agency in India (even if) owned or controlled by a person resident outside India or it is an office, branch or agency outside India owned or controlled by a person resident in India. In other words, a company registered in India is considered an Indian entity even if it is fully owned or managed by persons or company outside India. A foreign company’s branch or agency or office in India is a resident entity irrespective of who

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AUGUST 2010

manages it. If an Indian registered company has a branch or subsidiary outside India, it will be considered as resident entity, if it is owned or controlled by its parent company in India. Illustratively, Mumbai branch of Citibank is a resident entity so also the Tokyo branch of SBI. The subsidiary of ICICI Bank in Canada (incorporated there) is also Indian resident as per FEMA. Thus, ownership and management (and not place of registration) become relevant for an entity outside India and place of incorporation (and not ownership or management) becomes relevant in case of Indian based entities. These finer aspects are important because FEMA is applicable to all branches, offices and agencies outside India owned or controlled by a ‘person’ resident in India. To that extent, we can say FEMA is applicable all over the world! To have a control from foreign exchange angle over the branches of Indian companies abroad, they have been defined as resident entities though literally they are residing outside India. However, such classification has some incidental benefit also. As per section 195(1) of IT Act, withholding tax is applicable on interest paid to nonresident entities. It says any person responsible for paying interest or any other taxable income to a non-resident shall deduct income

tax thereon at the rates in force. Withholding tax rates for payments made to non-residents are determined by the Finance Act passed by Parliament from time to time. At present, it is 20 percent for payment of interest. Thus if a company is availing a buyer’s credit from a bank abroad say Citibank NY, then the interest payable is taxable. Thus if the borrowing rate is 3 percent p.a. (including margin over LIBOR), the effective cost is 3.6 percent p.a. because the borrowing company has to pay 0.6 percent p.a. of the interest in equivalent rupee as withholding tax. However, if the buyer’s credit is availed from the foreign branch of an Indian bank say SBI New York, then the borrowing is (as per FEMA) from a ‘resident’ entity and hence no withholding tax is payable, i.e. the borrowing from SBI NY will be cheaper to that extent than borrowing from Citibank NY. That is why, we see brokers bringing offers from Indian bank branches abroad rather than from foreign bank branches abroad due to this cheaper cost. This advantage to SBI NY is due to the definition of its status as resident in FEMA. Similarly, under Foreign Contribution Regulation Act 1976, receiving contributions from foreigners requires either prior permission from or prior registration with Home Ministry of Government of India in

Chart 1 Bank deposit accounts possible, status-wise

Resident

Non-resident

Usual savings, current and fixed

Rupee

deposit accounts • In India: RFC, RFC(D), EEFC, Escrow

Foreign currency

… • Abroad; in select cases

Bank deposit accounts possible, nationality-wise Rupee

Indian or foreigner permanently in India Usual savings, current, fixed deposit accounts, etc.

NRO & NRE

• FCNR(B) • Accounts abroad freely

Indians abroad with NRI status and PIOs

Non-PIO foreigner temporarily in India

Non-PIO foreigner permanently outside India

NRO & NRE

NRO

None in India

FCNR

None in India

None in India

• In India: RFC, RFC(D), EEFC, Foreign currency

Escrow … • Abroad; in select cases

INDIAN ENGINEERING EXPORTS


EXPERTEYE T R SHASTRI

defined cases. However non-resident Indians abroad are not treated as foreigners and hence receiving contributions from them, by any amount, does not attract the provisions of FCRA and hence is being used as a convenient window by many (otherwise ineligible) beneficiaries in India. The global income of an Indian is not liable to tax in India so long as he is non-resident or resident but not ordinarily resident, i.e. only the income earned in India is subject to Indian tax. On the other hand, for a resident, both the income in India and that outside India are taxable in India. The deposits in NRE and FCNR accounts opened by banks for NRIs and PIOs (persons of Indian origin) are tax-free, i.e. the interest is free from income-tax and the principal is excluded from wealth tax. To take advantage of these and to escape the perceived rigors of FEMA, many wish to classify themselves as nonresidents, if there is provision. Reserve Bank has clarified that it does not determine the residential status. Under FEMA, residential status is determined by operation of law. The onus is on an individual to prove his/her residential status, if questioned by any authority. Thus if a person has a business establishment in India solely run by him and also has a business say in Dubai, again solely owned by him, he could be considered as resident or non-resident depending on how he presents himself to the bank where he wishes to open an account, though strictly from FEMA angle, he is a resident. The reference to ‘to be or not to be’ is relevant here because none can claim a resident and non-resident status simultaneously. In case of individuals, a person resident in India means a person residing in India for more than 182 days during the preceding financial year but does not include a person who has gone out of India for employment, or business or vocation outside India, or for any other purpose indicating an intention to stay outside India for an uncertain period. One who is employed in India or one has a business or vocation in India or is in India for

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any other purpose indicating an intention to stay in India for an uncertain period is also a resident, irrespective of number of days stayed abroad during the previous financial year. When FERA existed prior to FEMA, this clause of ‘more than 182 days in the previous FY’ as an eligibility was not existing but to harmonise the definition of a resident both from foreign exchange and income-tax provisions, this has been introduced in FEMA. However, the attempt is clumsy because the requirement under IT Act is ‘182 days or more’ whereas FEMA refers to ‘more than 182 days.’ A ‘person resident outside India’ of course has been defined as a person who is not resident in India. An NRI is a non-resident Indian. Special types of bank accounts – NRE, NRO & FCNR accounts – can be opened by both NRIs and PIOs. Chart 1 lists the types of special banks.

Resident status from income-tax angle The definition of resident from income-tax angle is different. FEMA defines resident status as of now because foreign exchange transaction may take place now. Whereas income tax is finalised for the last financial year now and hence IT Act defines resident status having regard to the circumstances in the ‘previous year,’ which means the financial year immediately preceding the present assessment year. In other words, a company’s status under IT Act can be defined only after the end of the financial year. As per the IT Act, a company is said to be resident in India in any previous year, if it is an Indian company (i.e. one registered under the Companies Act 1956) or during that year, the control and management of its affairs is situated wholly in India. Every other person, i.e. like firms, unincorporated bodies, etc. is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India. Thus if a foreign company has a branch in India, which is managed and controlled by its Head Office outside India, then it will not be a resident as per the

IT act whereas it will be a resident as per FEMA. There are very lengthy definitions for residents, non-residents and not ordinarily residents as applicable to individuals in the IT Act. To facilitate returning Indians, the past history of their place of residence up to ‘ten previous years preceding that year’ need to be taken into account. Quite a herculean task to save tax! IT Act also defines other categories of companies, for example, Indian company means a company formed and registered under the Companies Act 1956 and includes corporations under equivalent acts, etc. However, the registered or principal office of such company, corporation, institution, association or body should be in India. Domestic company means an Indian company. Any other company, which has taxable income in India and has made the prescribed arrangements for the declaration and payment, within India, of the dividends payable out of such income, is also treated as domestic company. Foreign company means a company, which is not a domestic company. These terms Indian company, domestic company and foreign company are not defined under FEMA. However, for limited purposes, in the notifications issued under FEMA, from time to time, some such terms have been defined, for example, in the context of establishing a branch or office in India, a ‘foreign company’ has been defined as a body corporate incorporated outside India, and includes a firm or other association of individuals. In the context of investments in India (like FDI and FII), ‘Indian company’ means a company incorporated in India. These definitions are, therefore, very similar from both the contexts. It is always essential to know the residential and nationality status of our counter party, with whom we propose to deal. For bankers, it helps in deciding the eligibility for opening different types of bank account. For a corporate, it could be to measure the applicable tax either income tax or withholding tax. After all, the tax implications decide the major part of costing!

INDIAN ENGINEERING EXPORTS


CANADA GERMANY

SERBIA

MARKETS EEPC INDIA

MARKET NEWS INDONESIA The Indonesian Central Bureau of Statistics recorded that the country’s exports increased 4.06 percent in May 2010 from $12.52 billion in April 2010. May 2010`s year-on-year exports went up 36 percent, compare to May 2009. The 10 prime export products are coffee, shrimp, textiles and textile products, footwear, automotive and electronic products, cacao, palm oil, forestry products, rubber and rubber products. India-ASEAN Trade in Goods Agreement:

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AUGUST 2010

The Republic of Indonesia has ratified the India-ASEAN Trade in Goods Agreement. According to official sources, the AIFTA would potentially create benefits for local products such as CPO, textiles and clothing although domestic products might have difficulties in competing with cheaper pharmaceutical and automotive products imported from India. Without a free trade agreement with India, Indonesia would miss out on potential revenues of about $3 billion from CPO exports a year and could lead to a potential loss of $8 billion if combined with other products. Courtesy: Embassy of India in Jakarta

KAZAKHSTAN Kazakhstan’s overall trade with India has decreased from $119.26 million ( J a n u a r y - Ap r i l 2009) to $114.80 million (January-April 2010), resulting in a decrease of 3.73 percent in total trade. In comparison with January-April 2009 imports from Kazakhstan have decreased by 26.05 percent (from $71.81 million to $53.10 million) whereas India’s exports to Kazakhstan have increased by 30.03 percent (from $47.45 million to $61.70 million). Courtesy: Embassy of India in Almaty

INDIAN ENGINEERING EXPORTS


KAZAKHSTAN

INDONESIA

Total foreign trade of Kazakhstan January-April 2010 ($ million) Jan-Apr 2009

Items

5 principal import items from India to Kazakhstan January-April 2010 ($ ’000)

Jan-Apr 2010

Items

$ ’000s

% growth rate

1

Pharmaceutical and medical products

21,550.90 16,537.40

Import

8,436.23

7,661.20

(-)9.18

2

Tea

Export

10,805.17

18,287.60

(+)69.24

3

Industrial machinery, equipment, milling machinery and spares

7,035.00

Total trade

19,241.40

25,948.80

(+)34.85

4

Electrical equipment and spare parts

5,100.00

(+)2,368.94

(+)10,626.60

5

Textiles, garments

2,836.00

Trade balance

4 principal export items from Kazakhstan to India January-April 2010 Items

$ ’000s

1

Chemicals

32,861.40

2

Iron and plain steel slabs

20,567.80

3

Asbestos

6,339.50

4

Titan and its products

1,386.50

INDIAN ENGINEERING EXPORTS

CANADA Canada announced at the meeting of the Committee on Market Access on 29 April 2010 that it had become a tariff-free zone for manufac-

turing inputs and machinery. It was committed to maintaining open markets to help the global economy recover, adding that this unilateral action would help raise the competitiveness of Canadian companies. The key beneficiaries to this initiative would be small and medium-sized companies that must

AUGUST 2010

31


MARKETS EEPC INDIA

source goods for production from global supply chains. Beyond lower cost through the elimination of tariffs, these companies would also see a reduction in the costs of customs paperwork through eliminating the need to comply with certain preferential rules of origin requirements. Canada said that on 28 January 2009, it had reduced to zero 214 tariff lines, with a simple average tariff rate of 5.2 percent and accounting for over C$2 billion in annual dutiable imports. The government announced a second set of tariff liberalisation measures that eliminates the most-favoured-nation applied rates of customs duty on an additional 1,541 tariff items. The majority of these items became duty-free effective as of 5 March 2010, with the remainder scheduled to be gradually eliminated by no later than 1 January 2015. As a result of this latest action, Canada will have eliminated its remaining MFN applied rates of customs duty on manufacturing inputs and machinery and equipment and liberalised an additional C$ 5 billion in annual dutiable imports. Source: WTO News

SERBIA The Serbian economy continued to show signs of a gradual recovery. Serbian GDP grew a modest 1 percent in the first quarter. For the first five months of 2010, Serbia has seen an increase in industrial production. May 2010 figures compared to May 2009 expressed growth of 7 percent. Manufacturing registered growth of 7.9 percent along with a growth in the mining industry of around 10.9 percent. The energy sector registered a growth in production of some 1.8 percent. Foreign trade: The overall external trade in the Republic of Serbia for the period of January-May 2010 amounted to $10.01 billion, which was a 9.3 percent increase compared to the same period 2009. The value of

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exports amounted to $3.59 billion, which was a 20.4 percent increase when compared to the same period in 2009, while the value of imports amounted to $6.42 billion, which was a 4 percent increase relative to the same period in 2009. The trade deficit amounted to $2.82 billion, which was a decrease of 11.4 percent in relation to the same period in 2009. Top 10 export products: Hot rolled products of steel ($45 million), electricity ($24 million) , crude oil of bituminous minerals ($17 million) rolled products plated with tin ($16 million), copper plates and sheets($15 million), ferrous waste ($14 million), maize ($14 million), raspberries ($13 million), new car tyres ($11 million), aluminium plates and sheets ($11 million). Top 10 import products: Crude oil ($82 million), natural gas ($66 million), crude oils of bituminous minerals ($32 million), buses and minibuses ($29 million), copper refined ($18 million), semi-finished products of iron & steel ($16 million), retail medicaments ($14 million), coke and coal ($14 million), transmitters and equipment ($11 million), aluminium, not alloyed ($10 million). India-Serbia bilateral trade from January to the month of May 2010 amounted to $43.62 million of which $39.99 million were exports from India and $3.63 million imports into India. Embassy of India in Belgrade India’s top 5 exports to Serbia Product groups Total

GERMANY The German economy seems to have gained some momentum. Economists expect the country´s GDP to increase by 3 to 4 percent this quarter, backed by a weak euro which is propelling the export driven economy of the country, a continuing recovery of industrial output as well as repeated increases of industrial orders which surged by 2.8 percent in April. The improvement in the employment market also continued. The unemployment rate for May was lower than expected and sank to 7.5 percent as compared to 8.1 percent the month before, according to Federal Labour Agency (Bundesagentur für Arbeit). Further, this June, the German government announced the largest package of austerity measures in the country´s history, including amongst others, the introduction of new levies on nuclear fuel rods, airline ticket purchases and financial transactions. Thus, the government hopes to save € 80 billion by 2014. However, several economists warn that strict austerity measures may have unforeseeable impact on economic growth and may backfire. Courtesy: Consulate General of India, Frankfurt India’s top 5 imports from Serbia

$ ’000 39,997

Product groups Total

1. Pharmaceutical & chemical products

7,553

1. Products of Iron & Steel

2. Textile, yarn, garments & footwear

6,749

2. Machine parts

3. Coffee, tea ,spices & food products

2,750

3. Industrial pumps

4. Motor vehicles, tractors and equipment

1,578

4. Footwear & garments

5. Magnetic media for recording

768

5. Offset

$ ’000 3,626 2,245 1,121 86 83 19

Source: Statistical Office of the Republic of Serbia

INDIAN ENGINEERING EXPORTS


Revisión trimestral de la economía – 2009 TEMA PRINCIPAL CONSEJO NACIONAL DE INVESTIGACIÓN ECONÓMICA APLICADA (NCAER)

El trasfondo El PBI de India creció un 6.1 por ciento en el primer trimestre del año financiero 2009-10 con un impulso del sector de servicios, que

INDIAN ENGINEERING EXPORTS

alcanzó una tasa de crecimiento global de más del cinco por ciento. El crecimiento industrial aumentó su ritmo en los primeros dos meses del segundo trimestre, con un Índice de Producción Industrial (IPI) que alcanzó los dos dígitos en agosto, en el mismo período que el año pasado. Luego de un largo período de crecimiento industrial casi estancado desde octubre de 2008 hasta mayo de 2009, este es un signo significativo de la recuper-

ación de la industria desde el impacto de la crisis financiera y económica global. La producción industrial de bienes de consumo duraderos mostró un incremento marcado y consistente desde el comienzo del año financiero. La mejora en los bienes básicos y de capital ha sido un tanto errática si bien hubo un alza estable en el crecimiento de los sectores intermedios. La recuperación en el crecimiento indus-

AUGUST 2010

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TEMA PRINCIPAL CONSEJO NACIONAL DE INVESTIGACIÓN ECONÓMICA APLICADA (NCAER)

trial ha sido acompañada de una mejora en el desempeño corporativo y en los mercados de capital. La revisión por parte del RBI de la economía del segundo trimestre de 2009-10 demuestra que si bien las ventas en el sector corporativo (compañías no gubernamentales y entidades no financieras) no se han incrementado en la primera mitad del año, han aumentado las ganancias. El índice de precios de acciones Índice de la Bolsa de Valores de Bombay (BSE Sensex, por sus siglas en inglés) mostró una mejora sostenida, y registró un alza del 37 por ciento entre abril y agosto de 2009. La tasa de baja en las exportaciones, en una base interanual, ha disminuido. De hecho, desde mayo hasta agosto de 2009, las exportaciones aumentaron en forma consistente respecto del mes anterior. A nivel global, se percibe que las economías se están estabilizando y están volviendo con esfuerzo a un sendero de crecimiento lento y moderado. También hubo una mejora en el sentimiento económico. El mes de julio fue testigo de un incremento marcado en el Índice de Confianza Empresarial. Sin embargo, también hubo indicadores hacia los riesgos de la recuperación en el crecimiento. El monzón de este año ha sido pobre, y podría verse una baja en la producción de la agricultura. La divergencia en los índices de precio al por mayor y menor ha continuado, sin que logren moderarse los aumentos de precio de los artículos primarios. Si bien siguen siendo innecesarias una política monetaria acomodaticia y una política fiscal expansiva para mantener el crecimiento, la perspectiva en las presiones inflacionarias sigue siendo causal de preocupación. La revisión por parte del RBI de los desarrollos monetarios y macroeconómicos del segundo trimestre de 2009-10 observó que "Si bien la inversión prematura de la posición de la política monetaria conlleva el riesgo de cortar la recuperación, la persistencia de una posición acomodaticia podría impactar de forma adversa las expectativas de inflación”. Las preocupaciones que emana el largo

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período de recesión en las economías desarrolladas continúa siendo el centro de las políticas monetarias y fiscales. Si bien las evaluaciones recientes de las perspectivas de la economía global indican que la baja en la producción se ha moderado y las economías se están estabilizando, se espera que la recuperación en el crecimiento sea lenta y moderada. Existe una necesidad creciente de que los países en vías de desarrollo rebalanceen sus estrategias al menos a corto plazo, prestando más atención a fortalecer la demanda doméstica. En el contexto de la India, el gobierno ha señalado sus intenciones de mantener el apoyo fiscal para la recuperación del crecimiento económico y la reducción del riesgo de presiones inflacionarias. Parte de la recuperación del crecimiento económico que se observó en el año financiero actual puede atribuirse a las medidas de política monetaria y fiscal, que dieron estabilidad a las condiciones de la demanda y estabilidad al sistema financiero. En este sentido, resulta necesario continuar con las políticas de apoyo hasta establecer un impulso de crecimiento de base amplia. Se necesitarían esfuerzos globales para asegurar que dicho ambiente prevalezca hasta ver indicios de crecimiento económico continuo. También se necesitan esfuerzos globales para reducir los efectos de enfermedades contagiosas como la gripe H1N1 y otras amenazas a la paz y la seguridad. En esta revisión de la economía para el segundo trimestre del año 2009-10 ofrecemos una discusión sobre las tendencias en tres sectores principales: agricultura, industria y servicios, los desarrollos en las condiciones monetarias y crediticias, el comercio exterior, los precios y las finanzas públicas. Asimismo, ofrecemos una re-evaluación de los parámetros macroeconómicos para 2009-10.

Agricultura, industria y servicios. La mayor preocupación respecto de los pronósticos para la agricultura en el corriente año ha sido la naturaleza errática del monzón. El alcance de la deficiencia de lluvias durante junio-septiembre de 2009 fue tan severo que

todo el país terminó por recibir niveles subnormales de lluvia durante este monzón. A un nivel regional amplio, las precipitaciones acumuladas del monzón fueron un 18 por ciento por debajo del período largo promedio en el Este, 26 por ciento más escasas en el Oeste y 38 por ciento más escasas en el Norte. Para la totalidad del país, el uso de áreas no irrigadas para cultivar cereales agregó información de la lluvia a nivel de subdivisión, y demostró que las deficiencias en la lluvia fueron de 23.5 por ciento por debajo del promedio a largo plazo. Puede estimarse la naturaleza errática de las lluvias de este año por el hecho de que 12 estados declararon condiciones de sequía en 299 distritos. Entre ellos, estados como Karnataka y Andhra Pradesh sufrieron severas inundaciones por la intensificación de las lluvias cuando se replegó el monzón del suroeste. Los estimados que se presentan en esta revisión sugieren que la producción de cereales kharif podría ser de un 12-17 por ciento menor que el año pasado y la producción de semillas oleaginosas kharif podría ser un 6 por ciento menor. Se espera que la producción de algodón y caña de azúcar muestre un crecimiento positivo. También se espera que la cosecha de rabi contrarreste algunas de las pérdidas en kharif gracias a que los niveles de agua en los reservorios que alimentan los sistemas de riego han alcanzado un nivel satisfactorio. El impacto de la disminución en la producción del kharif ha sido visible. El precio de las legumbres y vegetales fue alrededor de un 20 por ciento más alto en abril-septiembre de 2009 comparado con el mismo período del año pasado. La administración eficiente del comercio, la distribución y las políticas de precios para la agricultura serán una prioridad de las políticas de este año. En el caso de la industria, el aumento en el crecimiento de los primeros dos meses del T2: 2009-10 ha sido un signo positivo para los pronósticos de la economía en general. El aumento continuo en el sector de bienes de

INDIAN ENGINEERING EXPORTS


TEMA PRINCIPAL CONSEJO NACIONAL DE INVESTIGACIÓN ECONÓMICA APLICADA (NCAER)

consumo duraderos en los primeros cinco meses del año financiero actual podría reflejar algunos de los estímulos de las políticas fiscales sobre la demanda. Sin embargo, la recuperación del crecimiento ha sido de base un tanto amplia, dado que los sectores intermedios también mostraron una mejora continua en su crecimiento. Si bien las condiciones pobres para la agricultura podrían implicar un revés en la demanda de las áreas rurales, los altos precios de los productos agrícolas, si alcanzan a la producción granjera, podrían contrarrestar algunos de los efectos adversos de las pérdidas de la producción en la demanda. De forma más importante, la estabilidad en las condiciones de la demanda y en los mercados financieros podría restablecer la confianza del consumidor de la misma forma en que ha revivido la confianza en los negocios. En el caso de los servicios, las señales han sido mezcladas. Si bien algunos sectores importantes como el comercio, los hoteles y el transporte y comunicación registraron una tasa más baja de crecimiento en el T1: 2009-10 si lo comparamos con el crecimiento interanual el en T1: 2008-09, en el caso de las finanzas, los seguros, los bienes inmuebles y los servicios de negocios el crecimiento fue más alto este año comparado con el T1: 2008-09. Los datos trimestrales ajustados estacionalmente muestran una continuación en las tendencias de la producción en el año financiero actual para el sector de servicios, e inclusive para la construcción. De la variedad de indicadores de la actividad por sector de servicios, existen signos de un aumento en el ritmo de la producción en el primer trimestre de 2009-10 comparado a las condiciones en el T4: 2008-09. Mantener esta tendencia dependerá de mantener el impulso del crecimiento industrial, dado que la producción y los servicios relacionados al comercio requerirían las mismas condiciones de la demanda que se crearon para el crecimiento industrial.

Dinero y precios La segunda revisión trimestral del Banco de

INDIAN ENGINEERING EXPORTS

Reservas emitida el 27 de septiembre, además de demostrar signos de estabilidad en la posición política, también indicó un perfil de éxito del estímulo provisto en respuesta a la crisis financiera internacional. El reporte de la tasas de REPO (operaciones con pacto de recompra) y REPO en reversa siguen en 4.75 por ciento y 3.25 por ciento, mientras que el coeficiente de caja (CRR, por sus siglas en inglés) se mantuvo al 5 por ciento de demanda neta y de obligaciones a largo plazo (NDTL, por sus siglas en inglés). Sin embargo, se han anunciado algunas medidas que forman parte del éxito de la política monetaria acomodaticia. El ratio de liquidez estatutario (SRL, por sus siglas en inglés), que se había reducido desde un 25 por ciento de la demanda y las obligaciones a largo plazo a un 24 por ciento, se ha reestablecido en un 25 por ciento. El límite para los créditos de refinanciación de exportaciones, que había aumentado a 50 por ciento de créditos de exportación elegibles pendientes, ha vuelto al nivel pre-crisis de 15 por ciento. Las dos facilidades para el refinanciamiento no convencionales: (i) las facilidades de refinanciamiento especial para bancos comerciales programados; y (ii) facilidades repo con plazos especiales para bancos comerciales programados [para financiamiento de fondos mutuos (FMs, por sus siglas en inglés)], y para compañías de financiamiento de viviendas (HFCs, por sus siglas en inglés) están siendo descontinuadas con efectos inmediatos. También ha habido propuestas web para rever y modificar en forma apropiada los sistemas regulatorios en vista de las lecciones que nos ha dejado la crisis financiera que sufrió el mundo en los últimos 12 meses. La revisión que se presenta aquí apunta hacia la amplia divergencia en las tasas de interés globales y domésticas. La baja en la tasa de inflación ha aumentado las tasas de interés real aún más. Dichas condiciones resaltan el dilema de cuándo salir de la política económica acomodaticia. Teniendo en cuenta la falta de una recuperación significativa en las exportaciones a pesar de la

marcada devaluación de la rupia, esta revisión marca la necesidad de una recuperación en las condiciones globales de demanda para obtener una mejora continua en el desempeño de las exportaciones. El crecimiento débil en el crédito bancario para los sectores comerciales marca las etapas nacientes de recuperación económica. Dado que las tasas de interés siguen siendo relativamente altas, las compañías podrían no inclinarse a los préstamos y enfocarse en el control de gastos y la conservación de ganancias. El entusiasmo de los mercados de capital podría durar sólo si hay una mejora continua en las condiciones de producción de las economías avanzadas. Las tasas bajas de inflación que se experimentaron en el último año financiero fueron el resultado de la recesión en la actividad económica mundial. Mejorar las condiciones económicas podría implicar el aumento de precios de los productos básicos y luego de los manufacturados. Los precios del petróleo crudo, si bien son más bajos que los $100 por barril de marzo-septiembre de 2008, han comenzado a subir. Los precios al por menor, en especial para los artículos y productos comestibles, reflejan una tasa de inflación con un nivel de dos cifras. La preocupación sobre el potencial riesgo de un aumento de la tasa de inflación en los meses restantes del año parece estar justificada en vistas a la necesidad de moderar la inflación para recuperar la demanda de consumo e inversión.

Sector externo Se espera que, en 2009, el volumen de comercio mundial descienda por primera vez desde 1982. La caída podría llegar a un 11.9 por ciento. Las exportaciones de los países en desarrollo podrían disminuir un 7.2 por ciento. Los países avanzados recibirían el golpe mayor, dado que sus exportaciones podrían decaer un 13.6 por ciento. Muchos países del mundo están adoptando medidas proteccionistas a través de las medidas restrictivas de la OMC del comercio legal

AUGUST 2010

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TEMA PRINCIPAL CONSEJO NACIONAL DE INVESTIGACIÓN ECONÓMICA APLICADA (NCAER)

e ilegal. Desde el comienzo de la crisis financiera, el Banco Mundial reportó 78 medidas nuevas sobre el comercio anunciadas por diferentes países. Estas incluyen 66 medidas restrictivas del comercio de las que se han implementado 47. Alrededor de la mitad de dichas medidas tratan el aumento de aranceles. Otras medidas carecen de transparencia dado que se refieren a barreras no arancelarias y subsidios. La reanimación en los aumentos de precios de los productos básicos en los mercados internacionales ha sido impulsada por las mejoras en los sentimientos del mercado y la devaluación del dólar. Los precios del petróleo han aumentado gracias al aumento en la demanda y las restricciones en el suministro. Sin embargo, se espera que el 2009 traiga un declive en los precios de los productos básicos: 36.6 por ciento para el petróleo y 20.3 para productos no combustibles. Debido al aumento en el costo total de las importaciones a causa de los altos precios del petróleo crudo y la caída en las exportaciones por la reducción en la demanda, el déficit comercial de la India en 2008-09 excedió los $100 billones. La entrada de inversión extranjera directa (IEA) tocó los $9.5 billones en T1: 2009-10 comparada con $11.9 billones en T1: 2008-09.

dades registraron un crecimiento positivo de 7.2 por ciento en T1: 2009-10 comparado con 50 por ciento en T1: 2008-09. Los aranceles aduaneros registraron un crecimiento negativo de 37.4 por ciento en T1: 2009-10 contra un crecimiento positivo del 20 por ciento en T1: 2008-09. La Junta Central de Impuestos registró un crecimiento negativo del 23.8 por ciento en 5T1: 2009-10 comparado con un crecimiento negativo menor del 0.9 por ciento en el período correspondiente de 2009-10. La reducción de impuestos por un lado y la baja tasa de inflación por el otro podrían haber contribuido a la baja en la recaudación de rentas del año actual. Se necesita más aceleración en la actividad económica para ayudar a mejorar la recaudación del gobierno.

Re-evaluación de las condiciones macroeconómicas para 2009-10 El Consejo Económico Consultivo del Primer Ministro ha proyectado el crecimiento del PBI para 2009-10 en un 6.5 por ciento con una desviación del 6.25 al 6.75 por ciento. El

Tabla 1: Evaluación revisada de los parámetros macroeconómicos para 2009-10 Variables

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AUGUST 2010

Predicción para 2009-10 de abril 09

julio 09

octubre 09

PBI Real

Finanzas públicas El aumento en el crecimiento industrial aún no se refleja en las finanzas públicas. La información de abril-agosto demuestra que las recaudaciones impositivas y no impositivas se encuentran rezagadas con respecto a los niveles del año pasado. Los ingresos totales alcanzaron 25.6 por ciento de los estimados del Presupuesto para los primeros cinco meses de 2009-10 comparados con 26.89 para el mismo período de 2008-09. El programa de préstamos aún no alcanzó el ritmo del año pasado. En T1: 2009-10, el impuesto de sociedades registró un crecimiento pobre del 1.9 por ciento, comparado con el astronómico 43.4 por ciento del trimestre correspondiente de 2008-09. Los ingresos del impuesto de socie-

RBI también proyectó un crecimiento del 6.5 por ciento para 2009-10. En esta revisión, luego de analizar varios indicadores relevantes, se han proyectado los indicadores macroeconómicos claves para 2009-10. La evaluación revisada para el año en general ubica el crecimiento total del PBI en un 6.9 por ciento de PBI, más bajo que la predicción de julio de un 7.2 por ciento. La baja en el crecimiento es resultado de la baja en la producción agrícola estimada. Si bien se proyecta que el PBI agrícola descenderá un 1.5 por ciento, se proyecta que el PBI industrial (inclusive para la construcción) aumente un 6.9 por ciento. Se proyecta que el PBI del sector de servicios aumente un 9.5 por ciento. Se espera que el déficit fiscal del Centro sea del 6.3 por ciento del PBI, más bajo que el estimado por el Presupuesto, de 6.8 por ciento. La tasa total de inflación anual, correspondiente al índice de precios al por menor (WPI, por sus siglas en inglés) se proyecta a un 3.8 por ciento. La tabla 1 resume las proyecciones.

- Agricultura

2.5

1.0

-1.5

- Industria

6.3

6.7

6.9

- Servicios

8.5

9.4

9.5

Total

6.9

7.2

6.9

Exportación de mercadería

9.1

12.0

10.5

Mercadería

10

5.5

4.9

Inflación (WPI)

5.2

3.7

3.8

Como porcentaje del PBI en los precios de mercado Déficit fiscal

4.5

6.2

6.3

Déficit en cuenta corriente

3.5

2.4

2.5

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El empleo en la industria organizada: El sector ingeniero es el que más contribuye Fuerza laboral en India REVISIÓN POLICY WONK

E

l EEPC India (Consejo para la promoción de la exportación de ingeniería, según sus siglas en inglés) considera que la crisis económica global ha afectado el sector ingeniero del país de forma considerable lo que, a su vez, ha afectado la situación del empleo en el país. Sin embargo, es importante establecer la contribución exacta del sector ingeniero al empleo en la India respecto de otros sectores de la industria para que sea posible obtener una perspectiva adecuada del empleo en diferentes sectores de la industria india. Este escrito hace un intento modesto en esa dirección.

INDIAN ENGINEERING EXPORTS

De acuerdo al Ministerio de Trabajo, vide su comunicado de prensa con fecha 21 de marzo de 2007, la Organización Nacional de Muestras de Encuesta (NSSO, por sus siglas en inglés) obtiene estimaciones confiables de la fuerza laboral del país por medio de encuestas quinquenales sobre fuerza laboral, empleo y desempleo. La última de dichas encuestas quinquenales, de la que contamos con los resultados, se condujo durante 2004-05. La fuerza laboral completa de la India, según la Clasificación Nacional de Industria adoptada por la Organización Central de Estadística (CSO, por sus siglas en inglés), se clasifica en industrias como la agricultura y afines, minería y explotación de canteras, manufactura, electricidad, suministro de gas y agua, construcción, comercio, hoteles y restaurantes, transporte,

almacenamiento y comunicación y otros servicios. Por otro lado, los sectores se clasifican en sentido amplio en agricultura, industria y servicios. Según estas encuestas, el porcentaje de población que formaba parte de la fuerza laboral en 2004-05 era de alrededor del 43 por ciento, en comparación con el 40.6 por ciento en 1999-2000, con base en el estado usual. La Tabla 1 muestra las figuras del empleo en diferentes sectores de la economía entre 1999-2000 y 2004-05. De esta forma, el empleo total mostró un aumento desde 397 millones en 1999-2000 a 459.56 millones durante 2004-05, y se registró un crecimiento promedio en el empleo de 12.42 millones por año. La proporción de aumento en el empleo de 1990-2000 a 2004-05 en la agricultura, industria y servicios fue de aproximadamente 30.57 millones, 14.35 mil-

AUGUST 2010

V


REVISIÓN POLICY WONK

Tabla 1: Empleo en todos los sectores (en millones) Sectores

1999-2000

2004-05

Agricultura

238

268,57

Industria

69,2

83,55

Servicios

90,3

107,44

397,5

459,56

Total

Fuente: Ministerio de Trabajo & Gobierno de India (GOI, por sus siglas en inglés)

lones y 17.14 millones, y, por lo tanto, creció en un porcentaje de 2.6 por ciento, 4.1 por ciento y 3.8 por ciento respectivamente.

Tabla 2: Características principales según cada tipo de organización en la ASI de 2005-06 (Rs lakh) Tipo de organización

Fábricas (Números)

Capital fijo

Capital productivo

Capital invertido

1. Propiedad individual

38895

699668

1347479

1434427

2857

102853

175542

196439

3. Sociedades

46278

2316980

4674359

5122431

4. Sociedades anónimas

12627

38175074

46240396

52890178

5. Empresas públicas

35940

14037998

20450174

21943121

6. Empresas de ministerio

187

645015

815422

788072

7. Corporaciones públicas

413

3256656

4057302

4829623

49167

56114743

71563294

80450994

242

8244

15252

19085

54

2355

6469

7585

2046

1349382

1248979

2800603

2. Familia Conjunta (HUF, por sus siglas en inglés)

8. Sector corporativo 9. Industrias Khadi y locales 10. Industrias del telar 11. Sociedades cooperativas

El empleo en la industria organizada Veamos ahora el empleo en la industria organizada. Para estos fines, la mejor fuente de información es la Encuesta Anual de Industrias (ASI, por sus siglas en inglés) que lleva a cabo la CSO. La información más reciente de la ASI es de 2005-06 y es la información más fehaciente y actualizada. Primero, demos un vistazo a qué constituye "industria organizada" y el alcance de este sector de la economía india. La Tabla 2 nos provee dicha información. Veamos ahora la clasificación de las industrias más importantes y las características del empleo en dichas industrias. Esta información, conforme a la encuesta ASI más reciente, se encuentra en la Tabla 3. La tabla muestra que, de acuerdo la ASI de 2005-06, existen 140,160 fábricas en India dentro de 26 clasificaciones del NIC (Clasificación Industrial Nacional, por sus siglas en inglés), que emplean a 7.13 millones de trabajadores para un total de empleo de 9.1 millones. Esta información se clasifica en sectores amplios de industria para obtener el empleo exacto en cada uno de ellos. Por consiguiente, las 26 categorías de industria se subdividen en siete amplias industrias principales de la India en la Tabla 4. En la Tabla 5, nos encontramos frente a los porcentajes de cada sector de la industria en términos de total de fábricas y empleo. La Tabla 5 demuestra claramente que, según la información más reciente, la industria de la ingeniería tiene el número más alto

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AUGUST 2010

12. Otras (que incluyen RN) TOTAL

622

99803

108914

126298

140160

60694028

79140288

90157861

Fuente: Encuesta Anual de Industrias, Ministerio de Estadísticas e Implementación de Programas, GOI

Tabla 3: Características principales según los grupos de industrias más importantes en la ASI de 2005-06 NIC2004

Descripción

Fábricas

Trabajadores

Total de personas involucradas

24

Químicos y productos químicos

23

Carbón, productos de petróleo y combustible nuclear

10995

560863

825435

1037

65471

27

Metales básicos

85283

7228

488151

643594

34

Automotores, remolques y semirremolques

3069

276013

359936

15

Productos alimenticios y bebidas

25725

1092482

1391616

13810

1141372

1337007

9531

316171

466239

13999

471842

579170

4069

199796

274467

17

Productos textiles

29

Maquinaria y equipo, ncp

26

Productos minerales no metálicos

31

Maquinaria y aparatos eléctricos, ncp

35

Otros equipos de transporte

1886

154555

199230

28

Productos metálicos fabricados

8534

290063

372726

25

Productos de goma y plástico

7353

243160

317414

Otras industrias

5490

114716

177310

16

Tabaco y productos afines

3344

447034

473608

18

Indumentaria y vestimenta, Preparación y teñido de piel

3649

468132

541848

32

Radio, televisión y equipos de comunicación

1036

77984

115890

22

Publicación, imprenta y actividades afines

3319

85890

134888

21

Papel y productos de papel

3749

138684

177696

36

Muebles y otras manufacturas, ncp

2562

146760

189725

33

Instrumentos médicos, ópticos y de precisión

987

48699

71015

30

Oficinas, maquinaria contable y de cómputo

180

14368

21776

19

Cuero y productos afines

2443

146704

173892

20

Madera y productos de madera

3033

42767

56387

01

Agricultura y actividades relacionadas

2864

90274

109279

179

12473

14215

88

1674

2036

140160

7136097

9111680

14

Otras minerías y explotaciones

37

Reciclado Todas las Industrias

Fuente: Encuesta Anual de Industrias, Ministerio de Estadísticas e Implementación de Programas, GOI

de fábricas, que representan más del 27 por ciento del número total de fábricas en el país; emplea al 27 por ciento del total de trabajadores e involucra a casi el 29 por ciento del total de personas. La industria textil tiene un

porcentaje menor de fábricas comparada con la agricultura y las industrias misceláneas, pero alcanza un porcentaje similar en el total de trabajadores y el total de personas involucradas.

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REVISIÓN POLICY WONK

Tabla 4: Sectores principales de industria: Fábricas y empleo NIC-2004 Sector industrial Industria Química 24 Químicos y productos químicos 23 Carbón, productos de petróleo y combustible nuclear Total Agricultura y procesamiento de alimentos 15 Productos comestibles y bebidas 16 Tabaco y productos afines 01 Agricultura y actividades afines Total Textiles y productos textiles 17 Productos textiles 18 Indumentaria y vestimenta, preparación y teñido de piel Total Industria de la ingeniería 27 Metales básicos 34 Automotores, remolques y semirremolques 29 Maquinaria y equipos, ncp 31 Maquinaria y aparatos eléctricos, ncp 35 Otros equipos de transporte 28 Productos metálicos fabricados 36 Muebles y otras manufacturas, ncp 33 Instrumentos médicos, ópticos y de precisión 30 Oficina; maquinaria contable y de cómputo Total Cuero y productos afines 19 Cuero y productos afines Madera, papel y productos de papel 20 Madera y productos de madera 21 Papel y productos de papel Total Sectores misceláneos de la industria 25 Productos de goma y plástico Otras industrias 32 Radio, televisión y equipos de comunicación 22 Publicación, imprenta y actividades afines 14 Otras minerías y explotaciones 37 Reciclaje 26 Productos minerales no metálicos Total Fuente: Información de la ASI, reclasificada

Por lo tanto, el análisis anterior indica que la industria de la ingeniería es la mayor fuente de empleo del país y una reducción en su actividad tendrá un impacto considerable en el empleo del país.

Para concluir… Un escrutinio de cerca a la información de la ASI que provee el Ministerio de Estadísticas e Implementación de Programas demuestra que el empleo en la industria de la ingeniería es mayor, en términos tanto absolutos como relativos, que en las demás industrias principales. Por lo tanto, resulta claro que el impacto de la recesión global sobre el sector ingeniero tendrá importantes efectos sobre el sector organizado del país.

INDIAN ENGINEERING EXPORTS

Fábricas

Trabajadores Total de personas involucradas

10995 1037 12032

560863 65471 626334

825435 85283 910718

25725 3344 2864 31933

1092482 447034 90274 1629790

1391616 473608 109279 1974503

13810 3649 17459

1141372 468132 1609504

1337007 541848 1878855

7228 3069 9531 4069 1886 8534 2562 987 180 38046

488151 276013 316171 199796 154555 290063 146760 48699 14368 1934576

643594 359936 466239 274467 199230 372726 189725 71015 21776 2598708

2443

146704

173892

3033 3749 6782

42767 138684 181451

56387 177696 234083

7353 5490 1036 3319 179 88 13999 31464

243160 114716 77984 85890 12473 1674 471842 1007739

317414 177310 115890 134888 14215 2036 579170 1340923

Tabla 5: Porcentaje de los sectores principales de la industria en el total de fábricas y empleo Sectores principales de la industria Industria química Industria de la Agricultura y procesamiento de alimentos Industria y textil y sus productos Industria de la ingeniería Industria del cuero y sus productos Industria del papel y productos de papel Industrias Misceláneas Total

Total de Porcentaje Porcentaje en Fábricas Trabajadores personas en total total fábricas involucradas trabajadores

Porcentaje en total de personas involucradas

12032

626334

910718

8,58

8,77

9,99

31933

1629790

1974503

22,78

22,83

21,67

17459

1609504

1878855

12,45

22,55

20,62

38046

1934576

2598708

27,14

27,10

28,52

2443

146704

173892

1,74

2,05

1,90

6782

181451

234083

4,83

2,54

2,56

31464

1007739

1340923

22,44

14,12

14,71

140159

7136098

9111682

100

100

100

Fuente: Información de la ASI, cálculos por el EEPC India

AUGUST 2010

VII


OJOEXPERTO RUPNARAYAN BOSE RN Bose es el ex-director ejecutivo de TransAfrica Bank Ltd, Kampala, Uganda

V

isité suelo africano por primera vez a principios de 1998, para ocupar un cargo en un banco comercial en África del Este. El banco era de carácter privado. Su presidente, quien también era su accionista principal, era un empresario industrial, el segundo fabricante más importante de productos plásticos en Asia del Este. Era un ciudadano de Kenia de origen indio, un Gujarati cuyos padres habían emigrado a Kenia antes de su nacimiento. Alrededor de 100,000 personas del subcontinente indio, llamados asiáticos, se habían establecido en Kenia y contribuían en forma significativa a la economía de la región. Como es costumbre entre los bancos de propiedad asiática, su mayor exposición en la comunidad asiática local estaba dada por su gama de negocios de carácter general, en especial, su cartera de préstamos. Este pequeño banco era muy respetado en Kenia. El presidente era un empresario de corazón. Había construido su negocio desde cero. Estaba determinado a construir su empresa bancaria de forma similar. Se involucraba de cerca en sus dos emprendimientos, y dividía su rutina diaria para formar parte de la toma de decisiones tanto en su fábrica como en su banco. Como parte de su rutina, celebraba dos reuniones semanales en el banco. En dichas reuniones estaban presentes dos de los directores locales (socios en su compañía de plástico) y la alta gerencia del banco (mi director general y yo). El presidente revisaba todo el papeleo y las decisiones que tomábamos. También pasaba la primera mitad de cada día laboral en el banco, supervisando operaciones y atendiendo a los clientes. El Banco Central de Kenia no aprobaba su estilo de funcionamiento, pero nadie podía separarlo de su banco. En una de esas reuniones, se discutió el

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AUGUST 2010

tema de las tasas de interés punitivo que el banco había impuesto recientemente a sus prestatarios atrasados. El presidente dijo que varios de sus clientes (léase, sus amigos y colegas en la comunidad asiática) se habían quejado sobre la alta tasa de intereses (punitivos), y sugirió que el banco debía hacer algo para evitar perjudicarlos. De parte del banco le expliqué que el fin de estas tasas era ser punitivas (y mucho más altas que las tasas normales). El fin de dichas tasas era disuadir o desincentivar a potenciales morosos, mantener sus números lo más bajos posible y de

esa forma mejorar la calidad global de la cartera de préstamos del banco. El objetivo principal no era aumentar los ingresos del banco, sino imponer medidas disciplinarias financieras a los prestatarios. El presidente tenía una cuestión más para discutir. Explicó que, frecuentemente, algunos clientes debían recurrir a sobregiros y se veían incomodados al tener que concurrir al banco cada vez que necesitaban extraer dinero más allá de los límites sancionados. Sugirió que el banco debía sancionar del 25 al 30 por ciento más allá de la cuantía esti-

INDIAN ENGINEERING EXPORTS


Un año después… Revisamos las raíces de la crisis financiera global mada luego de la valuación para evitar los comunicados frecuentes al Banco Central de Kenia y los inconvenientes causados a los clientes (no necesariamente en ese orden). También aclaró que no le gustaba que el banco (nosotros) requiriera que los prestatarios visitaran el banco para ejecutar documentos de préstamos. ¿Por qué no podemos, por medio de servicio al cliente, visitar sus oficinas, cuando les resulte conveniente, para ejecutar documentos de seguridad? ¿Podríamos ser sumamente educados al redactar cartas a los titulares de cuentas de

INDIAN ENGINEERING EXPORTS

préstamos atrasados que no nos rinden beneficio, o inclusive al convocar a prestatarios incobrables para que no se sientan ofendidos por el banco? La cuestión que más lo aquejaba era que sus colegas estaban descontentos con él y con su banco. En reuniones sociales, le habían hecho llegar sus quejas sobre las severas sanciones que el banco les imponía por ocasionales atrasos, frecuentes retiros irregulares, o por no pagar a tiempo. El presidente estaba convencido de que dichas irregularidades eran normales a todo negocio. Un banco (en

especial, si era propiedad de otro asiático) debía ser “comprensivo” en lugar de explotar estas situaciones e incomodar o penalizar a los prestatarios para aumentar sus ganancias. Como dueño del banco, se encontraba en la posición de ayudar y ofrecer asistencia financiera a los miembros de su comunidad, cosa que siempre había hecho. Sin embargo, al tratar a sus semejantes de esa forma, el banco efectivamente debilitaba su posición. Sentía que el banco, en su afán por ser estricto, lo decepcionaba seriamente. No resultaba difícil entender su posición.

AUGUST 2010

IX


OJOEXPERTO RUPNARAYAN BOSE

Su compañía fabricante de plástico gozaba de grandes facilidades financieras de otros bancos en Nairobi. Como cliente, y más que nada, como prestatario, sabía exactamente qué se sentía. Desafortunadamente, aún como presidente del banco, seguía ocupando el lugar de cliente/prestatario de un banco. Para él, no existía una muralla china que separase su profesión como empresario industrial de su puesto como dueño de un banco. Le resultaba casi imposible ponerse en el lugar de un banquero o pensar como uno. Por lo tanto, no se daba cuenta de dónde debía estar su lealtad como presidente de un banco. Si resulta difícil para un empresario industrial pensar como un banquero sólo porque, por casualidad, era dueño de un banco, podría resultar aún más difícil para el “regulado” ocupar el lugar del “regulador”, o para un cazador ocupar el lugar de presa. Para ellos, la “muralla china” no existiría nunca. Afortunadamente, en India, dichas instancias de transición fácil y rápida por sobre la línea roja son escasas y poco frecuentes. En el RBI contamos con un regulador con la audacia suficiente como para cerrar el lugar justo cuando empieza la fiesta. En los Estados Unidos, el lobby empresarial tiene una gran influencia en el gobierno y sus miembros. Los grandes contribuyentes de fondos de campaña de políticos (esto es perfectamente legal) tienen una gran influencia sobre los legisladores de ese país. Formar parte de un lobby o grupo de presión es una profesión reconocida. Los que dejan el gobierno suelen recibir comisiones con compensaciones muy atractivas. Bajo esas circunstancias, la capacidad para cambiar completamente de lealtades y hacer un giro de 360 grados para pasar a ser regulador habiendo sido parte de los "regulados” resulta muy debatible. No resulta útil mencionar los nombres de los peces gordos de los mercados financieros que pasaron a ocupar posiciones de mucha influencia en el gobierno de los EE.UU. Vamos a enfocarnos sólo en uno de ellos, quien es reconocido por su gran contribución

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AUGUST 2010

a la reciente crisis financiera global. Su nombre es Phil Gramm, un republicano originario de Tejas con un doctorado en economía. Antes de ingresar al mundo político en 1970, enseñaba en la Universidad A&M de Tejas. “Algunos miran a los préstamos de alto riesgo y ven algo malo. Yo miro los préstamos de alto riesgo y veo al sueño americano entrar en acción" dijo. Fue presidente del Comité Bancario del Senado desde 1995 hasta 2000. Su banca en dicho Comité le ganó el apoyo de las institu-

ciones financieras más importantes de la nación. La administración de Clinton apoyó muchos de sus esfuerzos en pos de la desregulación. Otros miembros del Congreso (quienes, en la última década, recibieron colectivamente cientos de millones de dólares en contribuciones a los fondos de campaña de parte de donantes de la industria financiera) también jugaron sus respectivos roles. Desde 1989 hasta 2002, los registros federales de los EE.UU. demuestran que fue el mayor receptor de contribuciones

INDIAN ENGINEERING EXPORTS


OJOEXPERTO RUPNARAYAN BOSE

para fondos de campaña de parte de bancos comerciales y ocupaba un lugar en la lista de las cinco personas que más donaciones recibían de Wall Street. Con frecuencia, tanto él como su personal hacían apariciones en conferencias patrocinadas por la industria en todo el país. Pero ¿con quién estaba su lealtad realmente? Si al terminar de leer este artículo empiezas a preguntarte si los dementes deberían dirigir el psiquiátrico, te entiendo perfectamente. Los detalles de su ávido desempeño hoy forman parte del dominio público. Lo siguiente es un pantallazo, se tú el juez. Desde 1999 hasta 2001, mientras el Congreso de EE.UU. consideraba los pasos a seguir para frenar los préstamos depredadores, Phil Gramm hacía todo a su alcance para bloquear dichas medidas. En el año 2000, se negó a que su comité bancario considerara las propuestas, una intervención aclamada por la Asociación Nacional de Agentes Hipotecarios como un “gran, gran paso para nosotros”. Un año más tarde, volvió a objetar cuando los demócratas intentaron frenar que los prestamistas pudiesen presentar demandas ante el tribunal de quiebras contra prestatarios que se habían atrasado en pagar préstamos depredadores. En 1999, jugó el rol principal al escribir y hacer aprobar por el Congreso la anulación del Acta Glass-Steagall. Dicha medida, conocida como el Acta Gramm-Leach-Bliley, fue la legislación sobre servicios financieros más significativa desde la Gran Depresión. Quitó las barreras entre bancos comerciales y de inversión que había sido instituida para reducir el riesgo de una catástrofe económica. El Acta dividía la supervisión regulatoria de conglomerados de empresas entre agencias gubernamentales. La Comisión de Seguridad y de Cambio, por ejemplo, supervisaría la parte bursátil de una compañía, los reguladores bancarios inspeccionarían las operaciones bancarias, y los comisionados del seguro estatales examinarían los negocios de seguros. Pero ningún organismo tendría autoridad sobre la totalidad de la compañía.

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Tampoco se prestó atención a cómo interactuarían estos reguladores el uno con el otro. La única gran falla del sistema era que nadie contempló las lagunas en la estructura regulatoria. De esa forma, Gramm creó lo que los analistas de Wall Street llaman “sistema bancario fantasma”, una industria que operaba sin supervisión del gobierno. Un año más tarde, el senado estadounidense se apuró en hacer aprobar un proyecto de ley de 11,000 páginas sobre reautorización gubernamental. Gramm logró deslizar una enmienda de 262 páginas. En lo que un manual de leyes llamaría más tarde “un desconcertante alejamiento de la práctica legislativa normal”, el Senado, urgido por el Senador por Tejas Phil Gramm, añadió una compleja enmienda de 262 páginas llamada “Acta de Modernización de Futuros en Materias Primas del 2000” (CMFA, por sus siglas en inglés). En dicha Acta, Phil Gramm insertó una disposición clave que les prohibía a las agencias federales regular los derivados financieros, y eximía de la regulación de la Comisión del Comercio en Futuros sobre Mercancías (CFTC, por sus siglas en inglés) a derivados fuera de la bolsa de comercio como los cambios de incumplimiento crediticio. Gramm proclamó como objetivo “proteger a las instituciones financieras de un exceso de regulación”, y “posicionar nuestros servicios financieros en una posición mundial líder en el nuevo siglo”. La legislación creó lo que luego pasó a llamarse “la laguna jurídica de Enron”. Contenía una disposición (presionada por Enron) que eximía de supervisión regulatoria al comercio energético. Le permitió a Enron (un generoso contribuyente de los fondos electorales de Gramm) funcionar sin control y destrozar el mercado eléctrico de California, lo que en última instancia, antes de su colapso, les costó millones a los consumidores y accionistas. Pero para Phil Gramm, Enron era un negocio familiar. Ocho años antes, su esposa, Wendy Gramm, como presidenta de la CFTC, había hecho aprobar una regla que excluía a los contratos futuros de Enron de cualquier

supervisión por parte del gobierno. Más tarde, Wendy se unió a la junta de Enron y en los años siguientes su salario y ganancias de acciones llevaron $915,000 y $1.8 millones de dólares al hogar Gramm. Dicho sea de paso, el Director Ejecutivo de Enron, Ken Lay, presidió la campaña de reelección de Gramm en 1992. En el año 2002, Gramm dejó el Congreso para unirse al UBS (Union Bank of Switzerland) como su principal banquero de inversión, a la cabeza de las operaciones de lobby. El USB había adquirido la casa de corretaje PaineWebber gracias a su acta de desregulación bancaria. Desde el UBS, ayudaba a persuadir a los legisladores de bloquear los esfuerzos de los demócratas en el Congreso para combatir los préstamos depredadores. USB terminó por ser uno de los perdedores más grandes de la crisis de los préstamos de alto riesgo. “Están diciendo que hubo quince años de desregulación masiva y que eso causó el problema” dijo Gramm sobre sus críticos. “No veo ninguna evidencia de ello”. Phil Gramm dijo en una entrevista: “En términos generales, los cambios de incumplimiento crediticio distribuyeron los riesgos. No los crearon. La gente se ha enfocado en ellos únicamente porque algunos políticos no saben distinguir un cambio de incumplimiento crediticio de un nabo”. Los comentarios de Phil Gramm luego del Acta de Modernización de Futuros en materias primas fueron aprobados por el Congreso de los EE.UU. (al igual que otra legislación sin precedente de su autoría) y merecen atención: “El trabajo de este Congreso será visto como un momento crítico en el que logramos alejarnos de un tratamiento hacia los servicios financieros anticuado y propio de una era de Depresión para adoptar un esquema que posicionará a la industria de servicios financieros en una posición mundial líder al comienzo del nuevo siglo” dijo Gramm. Si, claro… Puedes contactar al autor en rnbose@gmail.com.

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COMENTARIO DIPANKAR DEY El Dr. Dey es Vicedecano (Investigación) de IBS, Calcuta

Comercio de agua virtual – verdaderas preocupaciones


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La escasez de agua se ha convertido en uno de los problemas macroeconómicos y ambientales más importantes de este siglo. Además del mercado “real" del agua, un poco aletargado hoy en día, existe otro gran mercado de "agua virtual": la cantidad de agua que se usa en la producción de comestibles, energía y otros productos. Es el contenido interno de agua de un producto. Se afirma que una solución a la escasez de agua es la responsabilidad por el “agua virtual” al idear políticas comerciales. La dilatación del dualismo doméstico en la producción y el consumo de comida y agua en países como India, es el resultado de una singular estrategia que los países del Norte han aplicado en las últimas décadas para que sus economías sean “verdes”. La táctica inicial era desplazar las industrias contaminantes a los países en vías de desarrollo. Ahora es el turno de la agricultura.

L

as técnicas agrícolas que usan agua y energía de forma intensiva, aplicadas a nivel mundial desde los años 50, han causado daños ecológicos graves mediante el uso indiscriminado de fertilizantes químicos a base de combustibles fósiles y agua subterránea. De esa forma, se han contaminado tanto el aire como el agua. Eventualmente, estas dos “propiedades comunes” que estaban disponibles en forma “gratuita” en los comienzos de la civilización humana, se han convertido en “bienes económicos".

La economía del agua La escasez de agua se ha convertido en uno de los problemas macroeconómicos y ambientales más importantes del siglo. En el año 2008, el Instituto Internacional de Agua de Estocolmo calculó que 1.4 billones de personas viven en “cuencas cerradas”, donde el agua existente no alcanza a cubrir las necesidades agrícolas, industriales, municipales y ambientales de todos los habitantes. El Banco Mundial y el gobierno de China estimaron que, por ejemplo, 54 por ciento del agua en los siete ríos principales de China se han vuelto inusables debido a la polución. Varios ríos importantes, incluyendo el Indus, Río Grande, Colorado, MurrayDarling y Amarillo ya no desembocan en el mar todo el año debido a la creciente porción de sus aguas que se destina a usos varios. Los niveles acuíferos están decayendo debido a

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que se ha bombeado en exceso el agua subterránea en Asia del Sur, el norte de China, Asia Occidental y el suroeste de los Estados Unidos, y la producción de alimentos suele volverse insostenible. El Banco Mundial estima que 15 por ciento de los alimentos que se producen en India usan agua de acuíferos no renovables.1 Un equipo de hidrólogos del Centro de Vuelo Espacial Goddard de la NASA en Greenbelt descubrieron que el suministro de agua subterránea del norte de India se bombea y consume para satisfacer actividades humanas como la irrigación de tierra de cultivo, vaciando los acuíferos sin que los procesos naturales alcancen a reabastecerlos. De acuerdo a ellos, entre 2002 y 2008, más de 108 km3 de agua subterránea ha desaparecido de los acuíferos de Haryana, Punyab, Rajastán y Delhi2. La rápida urbanización, en especial luego de la primera revolución verde de los años 50, también aumentó la demanda de agua para uso doméstico e industrial. En el sureste de Asia, que se consideraba una historia de éxito de la Revolución Verde, la población urbana creció de un 20 por ciento en 1975 a un 35 por ciento en el año 2000. Los pequeños granjeros, al no poder competir con operaciones más grandes que contaban con el efectivo para comprar el “paquete” de la Revolución Verde (con semillas híbridas, fertilizantes, pesticidas y acceso a proyectos

lujosos de irrigación), comenzaron a migrar en masa a las grandes ciudades en los años 60 y 70. El Banco Mundial reconoce que para el año 2030, más de la mitad de los pobladores del sureste de Asia serán habitantes de la urbe.3 Se entiende que la agricultura sufrirá efectos adversos en el futuro cercano debido al aumento de la temperatura global. Para tratar este desafío, los grupos expertos globales y las asociaciones corporativas trasnacionales asociadas a la agricultura han recomendado una nueva “revolución verde” con bases en la agrotecnología. Se discute si las plantas cuyos genes tienen cierta tolerancia a la sequía serán importantes para los países en vías de desarrollo, dado que se proyecta a la sequía como el impedimento predominante para el crecimiento de la productividad del cultivo. Se proyecta que las aplicaciones en masa de biotecnología y bioinformática serán los propulsores apropiados para esta segunda revolución verde.4 El avecinamiento de la escasez de agua, consecuencia directa de la primera revolución verde, no sólo ha preparado el terreno para la introducción de semillas genéticamente modificadas (GM) y para una segunda revolución verde, también ha creado un vasto mercado. En el año 2008, el mercado global de agua se estimó en $316 billones y las transacciones en el mercado asiático, el mercado de agua con el crecimiento más rápido

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en el mundo, se estimaron en alrededor de $120 billones en un año.5 Con vistas a grandes ingresos por parte de este mercado en rápido crecimiento, grandes corporaciones de todo el mundo están invirtiendo en forma privada en diferentes proyectos de agua. Entre 1987 y 2002, se invirtieron $35 billones en compromisos de inversión de agua y sistemas de saneamiento en países en vías de desarrollo, de los cuales 10 por ciento eran IEA. Tres TNC de agua: Thames-RWE (Alemania), y Suez Lyonnaise y Veolia Environment SA (Francia), fueron los inversores principales en servicios de agua.6 La industria recibió un gran impulso luego del Acuerdo General sobre el Comercio de Servicios (AGCS) de 1995, que intenta intensificar el poder de las corporaciones transnacionales sobre los gobiernos (nacionales, provinciales y locales) y reducir el alcance de los gobiernos para proveer servicios básicos como la salud, la educación y el agua.7 En 1999, la privatización del SEMAPA, el serviciomunicipaldeaguapotableenCochabamba, la tercera ciudad más grande de Bolivia, fue un claro ejemplo de la dominancia corporativa sobre los gobiernos en el suministro de necesidades básicas como el agua.8 Hasta ahora, el mercado de agua se ha limitado a los sectores de consumo personal e industrial. Como sucede con otras industrias, el suministro de agua también está dominado por unas pocas corporaciones transnacionales, mayormente europeas. En el año 2005, el 95 por ciento de los servicios de agua potable era controlado por compañías europeas.9 La lista selecta de las principales TNC involucradas en los servicios de agua potable, como indica el Recuadro 1, revela, entre otras cosas, a) la fuerte presencia de compañías europeas en la industria y b) la participación simultánea de dichas compañías en los servicios energéticos. Compañías como GE, Siemens, RWE y Bechtel, reconocidas mundialmente como servicios públicos involucrados en el sector energético, se han diver-

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sificado con éxito en el mercado de servicios de agua.

El comercio de agua virtual Además del mercado “real” de agua, un tanto aletargado hoy en día, existe un gran mercado de "agua virtual". El agua virtual/escondida es la cantidad de agua que se usa en la producción de alimentos, energía y otros productos. Es el contenido interno de agua de un producto. Es similar al concepto de "carbón escondido", que se refiere al dióxido de carbono que emiten las distintas etapas de la fabricación de un producto, desde la extracción de materia prima, pasando por el proceso de distribución, hasta el producto final que se provee al consumidor. Dependiendo de los cálculos, el término también puede usarse para incluir otros gases de efecto invernadero (GHG, por sus siglas en inglés).10 Si un país decide importar alimentos, puede ahorrar múltiples cantidades de su propio agua que de otro modo sería usada para el cultivo. Por ejemplo, para producir una tonelada de trigo se necesitan unos 1160 m3 de agua. Eso significa que existen 1160 m3 de agua virtual en una tonelada de trigo. De esa forma, si India exporta una tonelada de trigo a Japón, eso significa un flujo virtual de 1160 m3 de agua desde India hacia Japón. Grandes segmentos de América del Norte y del Sur, Australia, Asia y África central son exportadores netos de agua virtual. La mayor parte de Europa, Japón, el norte y sur de África, el oeste de Asia, Méjico e Indonesia, por el contrario, son importadores netos de agua virtual. Se afirma que una solución a la escasez de agua es la responsabilidad por el “agua virtual” al idear políticas comerciales. El concepto de “agua virtual” está ganando reconocimiento. Se han hecho sugerencias para organizar un “consejo de comercio de agua virtual” bajo la Organización Mundial de Comercio (OMS) para ayudar a “lidiar con los recursos de agua real y virtual de la creciente población mundial.”11 Ya en 2002, la Unión Europea abrió por primera vez la discusión sobre la partici-

pación extranjera en la distribución de agua de los países en desarrollo. Luego, en 2005, durante las negociaciones sobre el AGCS bajo la Ronda de Goha de la OMS, se propuso que, a cambio de acceso a los mercados de agua, los países en desarrollo y los subdesarrollados (LDC, por sus siglas en inglés) recibirían el acceso a los mercados occidentales que tanto deseaban.12 Esto significa, en términos básicos, que los países en desarrollo tendrían acceso al mercado estadounidense para sus productos agrícolas siempre y cuando abrieran su sector de agua a las TNC. Al ser una región con población poco densa y una demanda de cereales moderadamente baja, los Estados Unidos han dado más importancia a la promoción del mercado para productos alimenticios de calidad cultivados, en su mayor parte, mediante cultivo orgánico.13 La Unión Europea emergerá como uno de los importadores principales de cereal dado que EE.UU. ofreció eliminar todos los subsidios para exportaciones en 2013. Los EE.UU son el mercado más grande de cereales para los productos alimenticios del tercer mundo.14 La Unión Europea tomó una decisión consciente de ahorrar sus escasos recursos de agua pasándoles la carga del cultivo a los países en desarrollo. La data de la “dependencia de la importación de agua” (WID, por sus siglas en inglés) de algunas de las economías de Europa corroborará esta observación. El WID (que se expresa con un porcentaje) es el ratio entre la “huella hídrica” (el volumen de agua que usa un país para producir bienes y servicios, que incluye las importaciones que consumen sus habitantes) de las importaciones de un país y la huella hídrica total. Cuanto más alto el ratio, es mayor la dependencia de un país de fuentes de agua exteriores. Durante 1997-2001, la “dependencia de importaciones de agua” de Holanda, el Reino Unido, Alemania, Italia, Francia y España era de 82 por ciento, 70 por ciento, 53 por ciento, 51 por ciento, 37 por ciento y 36 por ciento respectivamente. Las figuras correspondientes para India,

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COMENTARIO DIPANKAR DEY

Bangladesh, China y Brasil eran 2 por ciento, 3 por ciento, 7 por ciento y 8 por ciento. Y el WID de Japón y EE.UU. durante ese período era de 64 por ciento y 19 por ciento. De esa forma, durante 1997-2001, Holanda pudo reducir mediante importaciones su huella hídrica total ¡en un 82 por ciento! Previo a aplicar esta estrategia para el

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ahorro de agua, algunos países desarrollados habían aplicado la misma estrategia para reducir las emisiones de gases invernadero de sus economías. Un estudio sobre el "balance de emisiones contenidas en el comercio" (BEET, por sus siglas en inglés) de un número de países concluyó que el BEET de China (emisiones contenidas en el comercio menos

las emisiones contenidas en las importaciones) fue de 585.5 mtCO2, comparado con el BEET del Reino Unido que fue de -102.7 mtCO2. Las figuras correspondientes para Alemania, Japón, los EE.UU. e India son -139.9, -197.0, -438.9 y +70.9 mtCO2 respectivamente. Esto indica que al importar bienes manufacturados (netos) de otros países, el

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Reino Unido pudo transferir unos 102.7 mtCO2 de emisiones de carbono a los países exportadores.

Preocupaciones Los requerimientos de agua para producir unos pocos elementos comestibles como carne de vaca, carne de cerdo, carne de ave, huevos, arroz y trigo son muy altos. La producción de una tonelada de cada uno de esos elementos requiere 13,500, 4,600, 4,100, 2,700, 1,400 y 1,160 m3 de agua respectivamente. Si India exporta cualquiera de estos elementos de consumo intensivo de agua, entonces, por defecto, transferiría grandes cantidades de agua a los países importadores. En el futuro, en aras de proteger los recursos de agua, las naciones importadoras podrían pedir “etiquetas de agua" para garantizar que se usó sólo agua pura (preferentemente de recursos renovables) para la producción de los alimentos exportados. Al prohibir/desalentar el uso de arsénico y agua subterránea contaminada con plomo en la agricultura y la ganadería, las “etiquetas de agua” asegurarán la seguridad de la comida importada. En ese contexto, que resulta muy probable, los granjeros orgánicos, al apuntar a los mercados de países desarrollados, usarán fuentes renovables de agua para el cultivo cada vez más. Se desviarán fondos para desarrollar masas de agua que sirvan dicho propósito. Y las plantas procesadoras de agua colaborarán con los principales servicios de agua de los países importadores desarrollados para garantizar que se mantenga el nivel de pureza del agua que especifica la etiqueta. Mientras los ciudadanos de los países importadores del norte consumirían “productos verdes”, un gran número de indios perderían sus derechos básicos sobre el agua. Las condiciones de las fuentes de agua que ya están contaminadas, que abastecerían las necesidades de los sectores menos privilegiados de la población local, se deteriorarán aún más. Los servicios transnacionales de agua se harían cargo de los servicios de distribución

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municipal de agua15 y los gigantes de las bebidas gaseosas llegarían a cada rincón del país con sus marcas de agua embotellada ¡y cada litro podría costar aún más que un litro de leche! La dilatación del dualismo doméstico en los países del sur como India, en la producción y el consumo de agua y alimentos, es el resultado de una singular estrategia que los países del norte aplicaron durante las últimas décadas para que sus economías sean “verdes”16. La táctica inicial era desplazar las industrias contaminantes a los países en vías de desarrollo. Ahora es el turno de la agricultura. En el futuro, las “etiquetas de agua" como las etiquetas ecológicas o de carbono, podrían volverse obligatorias también para las exportaciones agrícolas. El Consejo de Comercio de Agua ya ha iniciado varias maniobras con estos fines y en su quinto Foro Mundial del Agua, que se llevó a cabo en Estambul en marzo de 2009, pidió, entre otras cosas, "estrategias unificadoras para el agua, los alimentos y la energía"17. Luego, en la Semana Mundial del Agua de agosto de 2009, organizada por el Instituto Internacional del Agua de Estocolmo (SIWI, por sus siglas en inglés) se reunieron expertos y profesionales del agua con autoridades y líderes mundiales para una discusión anual sobre problemas del agua con el fin de intercambiar ideas, identificar problemas y encontrar soluciones. Uno de los ensayos temáticos del cronograma era sobre "Huellas Hídricas: un nuevo punto de entrada para políticas sobre agua y estrategias corporativas sobre agua”, presentado por el Consejo Empresarial para el Desarrollo Sustentable (WBCSD, por sus siglas en inglés), una asociación global única, encabezada por Directores Generales de unas 200 compañías que se dedican exclusivamente al negocio y el desarrollo sustentable. El WBCSD se formó en 1995 mediante una fusión entre el Consejo Mundial de la Industria por el Medio ambiente (el brazo ambiental de la Cámara de Comercio

Internacional, dominado en su mayoría por líderes económicos de los EE.UU.) y el Consejo Empresarial Mundial para el Desarrollo Sustentable (dominado por líderes europeos del comercio). Dado que se utiliza una vasta cantidad de agua para los procesos de fabricación, producción y generación de formas tradicionales de energía eléctrica, las “huellas hídricas” de todas las exportaciones ingenieras podrían usarse como barreras no arancelarias para denegar el acceso al mercado. Los exportadores deberían tomar nota de estos desarrollos con antelación. Notas al pie. 1. Gardner G, 2009: Water Scarcity Looms, World Watch Institute, http:// www.worldwatch.org/node/6213? emc=el &m=279787&l=4&v=a274235068; 6 de agosto 2. http://timesofindia.indiatimes.com/ news/india/North-India-losinggroundwater-at-rate-of-foot-per-yr-Nasa/ articleshow/4892232.cms, visitado el 14 de agosto de 2009 3. http://www.grist.org, Why the ‘green revolution’ in Africa may be misguided, 26 Sept 2006 4. Dey, Dipankar, 2009: The Second Green Revolution in India: The Emerging Contradictions, Consequences and the Need for an Alternative Initiative, http://ssrn.com/ abstract=1447795; 12 de agosto 5. International Herald Tribune, ‘Asia holds promise of big profits for water industry,’ 1 Julio 2008, Error! Hyperlink reference not valid.bin/printfriendly. php?id=14125066 6. Reporte Mundial de Inversiones (WIR, por sus siglas en inglés) 2004 7. Public Citizen, Water and Trade, http:// www.citizen.org/cmep/Water/trade/; visitado el 11 de agosto de 2009 8. Luego, debido a la presión pública, el gobierno boliviano se vio obligado a revertir su decisión y cancelar el contrato que había celebrado con la TNC de agua.

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Ver Franz Chávez, Cochabamba’s ‘Water War,’ Six Years On, http://ipsnews.net/ print.asp?idnews=35418; visitado el 11 de agosto de 2009. Ver también Timeline: Cochabamba Water Revolt http://www. pbs.org/frontlineworld/stories/bolivia/ timeline.html 9. Euobserver.com, 16 de marzo de 2005: EU pressures developing countries for access to water services, http://euobserver. com/?aid=18673; visitado el 11 de agosto de 2009 10. Kejun J, A Cosbey & D Murphy, 2008: Embedded Carbon in traded goods, IISD, Canada 11. Virtual water trading could benefit developing countries, 13 de febrero de 2007; http:// www.unisa.edu.au/news/ 2007/130207 12. Euobserver.com, 16 de marzo de 2005: EU pressures developing countries for access

to water services, http://euobserver. com/?aid=18673; visitado el 11 de Agosto de 2009 13. La campaña “Buena para la naturaleza, buena para ti" http://ec.europa.eu/agriculture/quality/ 14. http://www.eurunion.org/eu/index2. php?option=com_content&do_ pdf=1&id=40; 6 de mayo de 2009 15. Luego de la privatización de la compañía municipal de agua y saneamiento, SEMAPA, en Cochabamba (Bolivia) en 1999, Aguas del Tunari (propiedad de la trasnacional estadounidense Bechtel junto con las corporaciones Edison de Italia y Abengoa de España) quien tenía la concesión del suministro de agua en la ciudad por 40 años, aumentó las tarifas de agua en un 200 por ciento. Las tarifas de agua significaban un 20 o 30 por ciento de los ingresos de los hogares pobres. Inclusive los

pozos que habían excavado las comunidades y cooperativas locales como solución a la falta de tuberías de agua quedó bajo el control de Aguas del Tunari, que luego adquirió el derecho a cobrar por el agua de los pozos comunitarios que no había excavado la empresa. Ver Franz Chevez, op cit 16. Para una discusión detallada de este téma, diríjase a Dey, D (2007), ‘SMEs: Rising Opportunities in the Emerging Blue Economy,’ publicado en octubre de 2007 en el International Edition of the ie2 – Revista del Consejo para la Promoción de la Exportación de Ingeniería (EEPC, por sus siglas en inglés), India . También se encuentra disponible en http://papers.ssrn.com/ sol3/papers. cfm?abstract_id= 1021236 17. http://www.worldwatercouncil.org/ fileadmin/wwc/World_Water_Forum/ WWF5/5th_Forum_Highlights. pdf, visitado el 12 de agosto de 2010

Recuadro 1: TNC en el negocio del agua • Thames-RWE (Alemania): En Noviembre del 2000, Thames Water se convirtió en una división de RWE. • Suez Lyonnais (Francia): En el transcurso de los años, Suez Lyonnaise des Eaux se ha transformado en una central eléctrica de múltiples servicios líder en el mundo, que ofrece agua, gas y electricidad privados y servicios de gestión de residuos en más de 120 países. Se formó como resultado de la fusión entre Compagnie de Suez (la compañía que construyó el canal de Suez), Lyonnaise des Eaux-Dumez y se unió con la Société Générale de Belgique (SGB). A través de Tractebel, su subsidiaria con sede en Bélgica, Suez es también la quinta productora de energía independiente más grande del mundo, con una capacidad de 42.000 megavatios por año. En el año 2000, la compañía reagrupó su gestión de residuos en sus subsidiarias Tractebel y SITA mientras que la generación de energía siguió siendo la fuente de ingresos principal de Suez Lyonnaise des Eaux. • Veolia Environnement (Francia): Veolia Environnement es la corporación más grande del mundo, y un líder mundial en servicios ambientales. Con operaciones en todos los continentes y más de 336,013 empleados, provee soluciones a medida para satisfacer las necesidades de consumidores municipales e industriales en cuatro segmentos complementarios: agua, servicios ambientales, servicios de energía y transporte de pasajeros. Veolia Environnement registró ganancias de 36.2 billones de euros en 2007. • Black and Veatch (EE.UU): Fundada en 1915, Black & Veatch se especializa en el desarrollo de infraestructura en la energía, el agua, las telecomunicaciones y asesoría gerencial y mercados ambientales. • Siemens Water Technologies (una unidad de Siemens AG Germany, la compañía de equipamiento eléctrico) • GE Water & Process Technologies (EE.UU, una unidad de General Electric) • International Water Holdings BV (Holanda): Una empresa conjunta con igualdad de aportes entre Bechtel Enterprise Holdings Inc, USA y Edison SpA, una afiliada del grupo Montedison, la compañía privada de servicios de energía más grande de Italia, International Water Holdings BV (IWH) se estableció como matriz según la ley holandesa el 8 de diciembre de 1999 y se registró ante la Cámara de Comercio de Amsterdam el 22 de diciembre del mismo año. IWH se dedica a proyectos de tratamiento de agua privada y de aguas residuales en todo el mundo. International Water Ltd, UK es la entidad activa que coordina todos los proyectos de agua en la que participan los socios de Bechtel/Edison. United Utilities con sede en el Reino Unido es un socio estratégico, que se encarga del trabajo del suelo. • Pepsi y CocaCola también se han aventurado en el comercio de agua embotellada y reciben ganancias sustanciales de este sector en rápido crecimiento.

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Por Purshottam K Godhia

La Metodología FASE I

Optimización del peso del hierro fundido Hoy en día, se necesita reducir el costo de los componentes mediante una reducción del peso inicial/ final de los mismos. Consideraremos el peso del hierro fundido gris, del hierro fundido nodular y de los componentes del hierro fundido.

a) Recolección de datos para la fundición Peso de las fundiciones aprobadas: Las piezas fundidas, propiamente desbarbadas y terminadas, deben pesarse para obtener un mínimo de 20 NOS, preferentemente de diferentes lotes obtenidos del mismo equipos de estampas con el mismo proceso de fabricación. Para piezas pequeñas de hasta 5 kg, el peso deberá tener 5 grs. de apreciación y para piezas de más de 5 kg, la apreciación será de 50gr. El peso promedio debe tomarse como el peso inicial de la pieza de fundición. Proceso de elaboración de la fundición: Se debe prestar especial atención al tipo de proceso de producción de proceso de fabricación de machos como la fundición con caja caliente, arena aglomerada con aceite o machos de arena revestida; procesos de moldeo como el moldeo a mano, moldeo por sacudidas, moldeo a presión y moldeo a alta presión - el montaje de los machos en moldeo también merece mención, como el manual, el automático o el pre-montaje; el vertido de metales manual o por presión y el tiempo de desmoldeo de las piezas. Se debe asegurar el mismo proceso de fabricación de las piezas todo el tiempo. Piezas defectuosas: Se deben recolectar datos reales sobre las piezas defectuosas con un año de antigüedad poniendo especial detalle en todos los parámetros como las sopladuras, inclusiones de arena, áreas sucias de las máquinas, porosidad, discrepancias en la medida de las piezas, piezas deformadas, etc. Estos datos sobre defectos deben recolectarse en la fase de fundición y nuevamente luego del mecanizado. Esquema de las piezas: Deben prepararse esquemas para todas las dimensiones de 5


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NOS, y promediar dichas dimensiones. Deben promediarse y verificarse las dimensiones relacionadas al maquinado, que deben ser de 10 NOS. Dichas dimensiones serán consideradas dimensiones iniciales. Proceso de maquinado: También es importante registrar la secuencia del proceso de maquinado desde la primera hasta la última operación y los tipos de máquinas usadas, sean convencionales o CNC. También debe registrarse la profundidad del corte mecanizado, la cantidad de pasadas y el tiempo de cada ciclo mecanizado de las piezas de fundición. Uso real de la pieza de fundición: Debe estudiarse el uso de la pieza a nivel de montaje, como también las áreas importantes y las dimensiones críticas de la pieza. Costo de cada pieza individual: Deben recolectarse y priorizarse los datos sobre gastos de comercialización de las piezas. Volumen de cada pieza individual: También deben recolectarse datos sobre el volumen en números de piezas vendidas. b) La “disciplina de fundición” en el proceso de elaboración de las piezas fundidas Machos: Debe asegurarse que los machos estén llenados, curados y preparados en forma apropiada. Moldeo: Se debe asegurar que las cajas de moldeo están en buenas condiciones y controlar la exactitud de los bujes y las clavijas de cierre en las cajas de moldeo. También deben asegurarse la concordancias de modelos con placas portamodelos y sus separaciones. Otros puntos que deben asegurarse son: Que los modelos estén fijados adecuadamente a las placas portamodelos con la menor discrepancia posible, que no existan muescas, que las laminaciones sean apropiadas, que no haya esquinas filosas ni engarces sueltos, y que las mazarotas y los pasadores de gas estén perpendiculares. Asegurar la compacidad de la arena de moldeo en moldes sin arena suelta, rajaduras o erosiones. Se debe cuidar que todas las propiedades de la arena estén en su lugar y que las cáscaras estén ubicadas en el molde

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de forma correcta. Fusión: Debe asegurarse que la mezcla de relleno se cargue con una secuencia predecidida, se debe controlar la temperatura y las propiedades de fusión antes del vertido, y que los rellenos de la moldura concuerden con el plan estipulado. Desmoldeo de la pieza, chorreo con granalla y desbarbado: Debe evitarse todo tipo de daño a la pieza durante el desmolde. Tanto el chorreo como el desbarbado deben hacerse con cuidado. c)Análisis de dato y priorización Luego del análisis de los datos recolectados, debe darse prioridad a los componentes de alto valor, alto volumen y alto peso. Es recomendable empezar con pocos componentes. d)Preparación del modelo CAD en 3D Muchos de los diseños para componer piezas están disponibles en 2D. Dichos diseños deben convertirse en modelos 3D con la ayuda de CAD procurando que los stocks de mecanizado sean de un mínimo de 2-2.5mm. Al decidir los stocks de mecanizado, se debe recordar mantenerlo a 2.5mm en la parte superior de las piezas y a 2mm en la parte inferior de las piezas como se elaboraron en la fundición. En el proceso de elaboración de fundiciones, se requieren las dimensiones críticas del mecanizado para delinear los procesos. Este modelo en 3D tiene la virtud de mostrar el peso real de la pieza una vez que se registra la densidad del material en el CAD. Esto nos provee de la diferencia de peso entre las piezas, que nos será útil para futuros cálculos. e) Comienzo de la actividad Una vez que se preseleccionan los componentes que requieren mejoras, deben analizarse los datos recolectados previamente para los promedios de stocks de mecanizado y el espesor de las paredes, y luego deben compararse con el modelo de diseño en 3D. Los cinco componentes siguientes deberían ser maquinados y pesados para conseguir las dimensiones esperadas. Estas piezas deben considerarse “piezas espera-

das” y deben ser maquinadas por completo. Se debe chequear que dichas piezas no contengan impurezas en los parches o deficiencias de fundición. Esto nos provee un nivel de confianza para reducir los arrabios. De forma similar, se pueden preseleccionar las áreas de mejora de las piezas. f)Medidas Se deben tomar acciones sobre cualquier modelo/ troquel previo que no esté en uso para cambiarlo si es necesario. Los cinco componentes de estas herramientas deberían verificarse para operaciones de mecanizado. Si se aprueban, se hará lo mismo con lotes más grandes de 100 y 500 NOS. Deben verificarse los resultados del mecanizado y las piezas rechazadas debido a cambios y, si no se encuentran anormalidades, podemos dedicarnos al montaje permanente. g)Auditoria La auditoría de las dimensiones cambiadas y de las piezas rechazadas es el siguiente paso, seguido de la actualización de las piezas/diseños herramentales y documentos relacionados.

FASE II Reducción del grosor de las piezas y remoción de los montajes indeseados en las piezas. Uso final de los componentes mecanizados de las piezas: Debe estudiarse el uso final de un componente a nivel funcional y de armado para preparar el listado de superficies y áreas mecanizadas. Se debe averiguar si realmente se requiere mecanizado en áreas no funcionales. ¿Puede evitarse el mecanizado y que un área permanezca como una pieza debido a las mejoras en la tecnología? ¿Puede hoy en día reducirse el grosor al fortalecer el componente con un grado mayor de material? ¿Pueden proveerse nervaduras o buscar diseños alternativos? Las respuestas resultarán en una reducción del peso del componente de la pieza. Análisis CAE: Debe realizarse un análisis CAE de los componentes mecanizados de

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una pieza para determinar si el componente está sobrediseñado. En caso de que lo esté, debe optimizarse el diseño, lo que resultará en una reducción del peso de la pieza. Estudio Benchmark: Se deben recolectar datos comparativos de los mismos componentes usados por la competencia para el mismo tipo de piezas, y debe analizarse su uso final para la mejora de ciertas áreas. Lengüetas indeseadas/orejetas de montaje: A veces, las piezas muestran lengüetas o orejetas de montajes no requeridas debido a cambios en el diseño del sistema. Dichas orejetas de montajes pueden removerse y así reducir el peso de la pieza. Acción: Deben realizarse y validarse muestras de configuraciones de cambio. Si se aprueban, se pueden modificar los montaje de herramientas existentes o realizar nuevos montajes de herramientas. Auditoria: La auditoriwa de las dimensiones cambiadas y de las piezas rechazadas es el siguiente paso, seguido de la actualización de las piezas/diseños de montaje y documentos relacionados.

Consumo energético en fundiciones de hierro Por M Arasu & L Rogers Jeffrey

Conclusión El autor llevó a cabo este ejercicio en varias piezas durante dos años, lo que resultó en ahorros considerables (tanto en materiales como en costos) en términos de peso de las piezas. Algunos ejemplos son:

D

Algunos ejemplos son: Componente

Reducción de peso (en kg.)

Volumen anual NOS

Tambores de freno

Rueda Volante

Caja del embrague

Tapa de cilindro

Tapa del motor

Eje

1.5

Cubierta

Bloque de Cilindros

El autor pertenece al Sector Automotriz de Mahindra and Mahindra Ltd, Mumbai. Este ensayo fue preparado para el Congreso Indio de Fundición número 57.

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ado que la fundición es una industria basada en la energía, resulta necesario llevar a cabo un registro para determinar dónde y cuándo se consume energía y cuán eficiente es el sistema de administración de la misma. Un método para contabilizar la energía debe definir las áreas de consumo alto y las de derroche así como señalar las áreas donde es posible ahorrar energía. El fin principal de la auditoría de energía es obtener el patrón de consumo energético. Dicho patrón sirve para entender la forma en que se usa la energía en una fundición y, al identificar las áreas de derroche y las áreas que pueden mejorarse, ayuda a controlar el costo energético. La

administración de energía resulta muy importante: se encarga del ajuste y la optimización de energía por medio de sistemas y métodos para reducir los requerimientos energéticos. Este ensayo presenta un estudio de caso de la energía requerida para producir una tonelada de metal líquido en cuatro fundiciones. Esto nos da una idea del consumo de energía actual de las fundiciones, el cual se puede comparar con estándares normativos y usarse para implementar métodos de control de desviación. Este ensayo también explora las diferentes vías para ahorrar energía y controlar los costos. Dado que la fundición es una industria que se basa en la energía, se realizan registros para

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Fig.1 Metodología para estudios de consumo energético

tonelada de metal líquido para distintas calidades de hierro fundido.

ESTUDIOS SOBRE CONSUMO ENERGÉTICO EN METALÚRGICAS DE FUNDICIÓN DE HIERRO CONSUMO ESPECÍFICO DE ENERGÍA

FUNDICIÓN DE HIERRO

PATRÓN DE CONSUMO ENERGÉTICO

Administración de energía

ADMINISTRACIÓN DE ENERGÍA

ESTUDIO EXPERIMENTAL

RECOLECCIÓN DE DATOS

La administración de energía es la estrategia para ajustar y optimizar la energía, que se vale de sistemas y métodos para reducir los requerimientos energéticos por unidad de producción manteniendo o reduciendo los costos totales de producción. El término administración de energía consiste de tres pasos básicos: planeamiento, ejecución y control.

Estudio experimental OBSERVACIÓN EXPERIMENTAL

COMPARACIÓN DE DESEMPEÑO – UTILIZACIÓN DE CAPACIDAD, CONSUMO ESPECÍFICO DE ENERGÍA

ANÁLISIS ESTADÍSTICO

determinar dónde y cuándo se consume energía y cuán eficiente es el sistema de administración de la misma. Define las áreas de consumo alto, advierte sobre el derroche y señala áreas susceptibles de ahorro de energía. La metodología de los estudios sobre consumo energético ejecutados en fundiciones se muestra en la Fig. 1 En las siguientes secciones, se lleva a cabo una discusión detallada sobre dichos métodos.

Tabla 2: Consumo energético específico de hornos de fundición

Patrón de consumo energético

Consumo específico de energía

El fin principal de la auditoría de energía es obtener el patrón de consumo energético. El patrón energético que muestra la Tabla 1 es útil para entender el modo en que se usa energía en una fundición y, al identificar las áreas de derroche y las áreas que pueden mejorarse, ayuda a controlar el costo energético. Se observa que la fundición consume una gran parte del total de energía.

El consumo específico de energía es la energía que se consume en la producción de una tonelada de metal líquido. La Tabla 2 muestra el consumo específico de energía por hornos de inducción, hornos rotativos y cúpula por

Tabla 1: Distribución del consumo energético Secciones

Consumo energético

Fusión

70%

Molduras y machería

10%

Planta de arena

6%

Iluminación

5%

Compresor

5%

Otro

4%

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Descripción

Consumo energético

Norma de consumo energético específico en Hornos de Inducción por tonelada de metal líquido

620 kWh/tonelada

Consumo específico de petróleo en hornos rotativos por tonelada de metal líquido

135 l/tonelada

Consumo específico de coque en cúpula por tonelada de 135 kg/tonelada metal líquido

En este ensayo, se lleva a cabo un estudio sobre la energía necesaria para producir una tonelada de metal líquido en las cuatro fundiciones seleccionadas. Esto nos da una idea del consumo de energía actual de las fundiciones, el cual se puede comparar con estándares normativos y usarse para implementar métodos de control de desviación. También se exploran las diferentes vías para ahorrar y controlar la energía y se recolectan datos relacionados al consumo de energía, rechazo y utilización de capacidades.

Recolección de datos Los datos sobre consumo energético y detalles del procedimiento fueron recolectados mediante un cuestionario llevado a cabo en cuatro fundiciones durante un período de dos años. Este estudio se limita al uso de combustible en el departamento de fusión y el consumo de energía eléctrica en distintos departamentos. Al comparar los datos, obtenemos una

Tabla 3: Consumo energético en fundiciones de hierro Descripción Capacidad instalada (toneladas/año) Producción actual (toneladas/año) Utilización de capacidad Fundiciones vendibles (toneladas/año) Rechazo (%) Comsumo de energía eléctrica (kWh/ mes) Utilidades (Kw) Horno de inducción (kWh/tonelada) Petróleo para horno (l/tonelada) Fundición/día (toneladas) Rendimiento (%)

Fundición A 10,800 9,072 84 5,900 8 5,28,320 1016 700 200 30 65

B 7,200 5,400 75 3,350 9 1,01,000 183 720 220 18 62

C 5,150 3,605 70 2,160 8 55,000 319 750 200 12 60

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D 8,400 6,048 72 3,630 10 1,29,000 122 740 210 20 60

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tendencia de consumo energético. El consumo de energía en diferentes formas debería expresarse en una unidad común para facilitar la comparación. La recolección de datos se llevó a cabo mediante instrumentos de medición del consumo de energía en diferentes sectores/ equipos. En todas las fundiciones, la producción era de hierro fundido Gris de y hierro fundido nodular, además, todas las fundiciones utilizaban hornos rotativos y de inducción. Aquí estudiamos en detalle el hierro fundido nodular. El consumo de energía total de las cuatro fundiciones se muestra en la Tabla 3. Se midieron los siguientes parámetros para las cuatro fundiciones: capacidad instalada, producción actual y consumo de energía eléctrica. Los resultados demuestran que la fundición A tiene una buena capacidad de utilización, de un 84 por ciento. Un estudio adicional nos provee una visión del consumo eléctrico mensual y su trascendencia en la capacidad del horno de inducción. El consumo eléctrico mensual es más alto en la fundición A, con la capacidad más baja del horno de inducción (700 kWh/tonelada) de las cuatro fundiciones estudiadas.

Observación experimental El patrón de consumo eléctrico de las cuatro fundiciones estudiadas se muestra en las Tablas 4 y 5. Se observa que la fuente principal de consumo eléctrico ocurre en el sector de fusión de las fundiciones. Utilización de la capacidad – comparación de las fundiciones Un buen desempeño en la fabricación no alcanza para garantizar la competividad de los costos. Es igual de importante utilizar la capacidad disponible en forma adecuada. La optimización de la utilización de capacidad depende de factores como el potencial de planeamiento de la producción y el aumento de opciones de equipo disponibles para la producción. De acuerdo al análisis, se observa que si bien la fundición A tiene una capacidad de fusión de 32 toneladas de hierro fundido por día, sólo produce de 24 a 30 toneladas diarias. El estudio revela que la capacidad de fusión se encuentra limitada por la capacidad de moldeo. Se observó que la relación estadística para este análisis estaba en la línea logarítmica. Asimismo, se observa que existe un efecto significativo del aumento del tiempo de enfriamiento sobre la sección de vertido.

Tabla 6: Relación entre utilización de capacidad y consumo específico de energía Utilización de capacidad (%)

Comsumo específico de energía (kWh/ tonelada)

72 72 70 71 75 78 75

625 625 628 629 617 614 614

Tabla 4: Consumo de energía eléctrica Secciones

Promedio de consumo eléctrico/mes (kWh) Giesserei A

Giesserei B

Planta de arena

26,245

1,000

720

5,250

Molduras y machería

15,855

9,000

540

8,400

Fusión

Giesserei C Giesserei D

4,28,085

7,700

15,300

78,750

Compresor

15855

1,000

360

2,100

Iluminación

21,140

9,000

720

5,250

Tabla 7: Comparación de la utilización de capacidad

Tabla 5: Comparación de la distribución de la energía eléctrica Distribución Secciones Estándar CII* Planta de arena

6

Fundición A

B

C

D

5

1

4

5

Molduras y machería

10

3

9

3

8

Fusión

70

81

77

85

75

Compresor

5

3

1

2

2

Iluminación

5

4

9

4

5

* Confederación de la Industria de la India

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Fundición

% de la utilización de capacidad

A B C D

84 75 70 72

Tabla 8 Comparación de consumo de energía específico SlFundición Nr. 1 2 3 4

A B C D

Consumo específico de petróleo (l/ tonelada) 200 220 200 210

Consumo específico de energía (kWh/ tonelada) 700 720 750 740

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Tabla 9: Producción anual vs. consumo energético SlConsumo Producción anual Fundición Nr. energético (MJ ) (toneladas) 1

A

4710

5900

2

B

4800

3350

3

C

3768

2160

4

D

5672

3630

Los hornos u ollas deben esperar para que se vierta el metal y como consecuencia, baja el calor, lo que resulta en una producción menor. Los elementos fijos de los requerimientos energéticos de las operaciones forman la base de un consumo alto de energía por tonelada con una capacidad de utilización baja. Por lo tanto, en este estudio se han hecho pruebas sobre hornos de fusión para determinar la relación matemática entre el consumo de energía y la utilización de la capacidad. El consumo específico de energía y el porcentaje de la utilización de la capacidad se recolectaron de hornos de fusión eléctricos en las fundiciones seleccionadas. El resumen de dichos datos se encuentra en la Tabla 6. La utilización de capacidad se encuentra dada por la producción actual de la capacidad instalada en un promedio anual. Los resultados se encuentran en la Tabla 7. La Fundición A opera con un 84 por ciento de utilización de capacidad. Puede observarse que el consumo eléctrico específico y el consumo de petróleo se minimizan cuando las fundiciones operan con más utilización de la capacidad. Comparación de consumo de energía específico Los siguientes valores de consumo energético se basan en la investigación y se obtuvieron de diferentes equipos de fusión de las fundiciones. Los resultados se encuentran en la Tabla 8. En la Fundición A, el consumo eléctrico específico del horno de inducción es 12.9 mayor y el consumo específico de petróleo del horno rotativo es 48.15 mayor que lo indicado por los estándares normativos CII. En la Fundición B, el consumo eléctrico

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específico del horno de inducción es 16.13 mayor y el consumo específico de petróleo del horno rotativo es 62.96 mayor que lo indicado por los estándares normativos CII. En la Fundición C, el consumo eléctrico específico del horno de inducción es 20.97 mayor y el consumo específico de petróleo del horno rotativo es 48.15 mayor que lo indicado por los estándares normativos CII. En la Fundición D, el consumo eléctrico específico del horno de inducción es 19.35 mayor y el consumo específico de petróleo del horno rotativo es 55.56 mayor que lo indicado por los estándares normativos CII. Según estudios sobre los patrones de consumo en hornos de inducción, el consumo específico de energía en las fundiciones es alrededor de un 18% mayor que lo indicado por los estándares normativos CII. También se observa que el consumo específico de petróleo en los hornos rotativos es alrededor de un 54 por ciento mayor que lo indicado por los estándares normativos.

Análisis estadístico Para llegar a un patrón de consumo energético se recomienda usar un modelo matemático. En este contexto, se desarrolla un modelo de análisis de regresión. El análisis de regresión es una herramienta estadística que compara la relación entre dos o más variables. Es la identificación de la relación entre variables dependientes y una o más variables indepen-

dientes. El análisis de regresión busca explicar los cambios en las variables dependientes en función de las variables independientes a través de la cuantificación de una sola ecuación. Se logró la cuantificación de una regresión linear simple en base a los valores de la Tabla 9. Y = 0.183X + 4046 [ec.1] (X= producción anual en toneladas y Y= consumo energético (MJ) En la ec. 1, la variable dependiente es el consumo energético MJ, y la variable independiente es la producción anual en toneladas. La Fig. 2, con base en la ec.1, muestra la relación entre la producción y el consumo energético. El análisis de regresión obtiene una curva normal y desarrolla una relación. Se observa que el modelo de arriba nos da la correlación positiva entre la producción anual y el consumo energético (coeficiente de regresión = +0.68) Esta relación resulta útil para predecir el consumo energético respecto del porcentaje de producción. Conforme al análisis anterior, se observa que el consumo energético específico se optimiza al aumentar la utilización de capacidad.

Conclusión Se observa que la fuente principal de consumo eléctrico es el sector de fusión de las fundiciones. De ese modo, se concluye que existe la posibilidad de reducir el consumo energético y aumentar la productividad. Los

Figura 2: Modelo de regresión linear para el consumo energético

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procedimientos de vertido y fusión se han identificado como factores claves en el consumo de energía. También se observa que las variables de los procesos estudiados tienen gran influencia sobre la calidad del fundido. Los estudios sobre patrones de consumo energético en hornos de inducción revelan que el consumo energético específico es 18 por ciento mayor que lo especificado por los estándares normativos CII. También se observa que el consumo específico de petróleo

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en los hornos rotativos es alrededor de un 54 por ciento mayor que lo indicado por los estándares normativos. Este estudio también reveló que las fundaciones operaban con una utilización de capacidad baja, lo que resultaba en una baja productividad. Dichos resultados en los costos energéticos altos aplican a la producción de fundiciones por tonelada. De acuerdo al análisis estadístico, se desarrolló un modelo generalizado con bases en la regresión linear para obtener la correl-

ación entre la producción de fundiciones y el consumo energético. Conforme al análisis de regresión, se observa que el consumo energético específico se reduce al aumentar la utilización de capacidad. El M Arasu es el Presidente del Departamento de Tecnología Metalúrgica de la Universidad Politécnica PSG, Coimbatore, L Rogers Jeffrey es parte B. Tech Final en la Universidad. Este ensayo fue preparado para el Congreso Indio de Fundición número 57.

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WORLDVIEW COLOMBIA

Colombia’s economy glows bright Bogotá, the capital of Colombia at night

Colombia has gradually resolved its problems to join the ‘emerging juggernauts’ of the global market with exports tripling over a decade to become a bright star in the Latin American constellation

T

he economy of Colombia, South America’s gateway to the world, is booming. Quietly, almost unnoticed

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in the shadows of the Latin American giants like Argentina, Brazil, Chile, etc. Colombia’s exports have tripled over the past decade,

there is a near-glut in the flow of foreign direct investments into the country and, according to the World Bank’s 2010 Doing Business report, Colombia today is the top country in Latin America to start or expand a business. Colombia, indeed, has come of age against all odds to ride with the ‘emerging juggernauts’ of the market economy, and, as Newsweek

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WORLDVIEW COLOMBIA

Downtown Bogotá

reports, in the past eight years the nation of 45 million has gone from a crime- and drugaddled candidate for failed state to a prospering dynamo. The society that once was plagued by car bombs, brain drain, and capital flight is now debating how to avoid ‘Dutch disease,’ the syndrome of too much foreign cash rolling in. Stable, booming, and democratic, Colombia has increasingly become ‘a bright star in the Latin American constellation.’ Colombia’s $248 billion economy is the fifth-largest in Latin America, though a trifle next to Brazil, the $2 trillion regional powerhouse. Oil and gas production are surging, and Colombia’s MSCI index jumped 15 percent between January and June, more than any other stock market this year. Since 2002, foreign direct investment has jumped fivefold (from $2 billion to $10 billion), while GDP per capita has doubled, to $5,700. A major milestone in the dramatic changes

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the country has undergone in the past decade has been the election of new Colombian President Juan Manuel as successor of widelypopular President Santos Alvaro Uribe. Viewing security as a top priority, President Uribe’s administration took strategic steps to stabilise Latin America’s oldest democracy and motivate positive change in Colombia. At the same time, in an effort to improve the country’s economy, a strong focus was directed towards the attraction of foreign direct investment, and has led to increased wealth in the country. With security and economic fundamentals vastly improved, innovation and exploration of untapped resources are now propelling Colombia forward as an emerging investment location. Increasingly recognised as a country with vast potential, Colombia’s biggest challenge is to close the ‘image gap’ between the public’s perception of Colombia

and Colombia’s new reality. Over the past decade Colombia’s economy has made drastic steps forward due to a strict government focus on security and investment promotion. Various industries, from energy and IT to tourism and healthcare, have seen the fruits of these efforts. Progress is reflected by Colombia’s emergence as a major world economic player, jumping six spots this yearinthemostrecentWorldCompetitiveness Report giving it the largest improvement in ranking of all the countries in the region. As experts predict emerging markets will grow up to three times faster than developed countries this year and will drive global economic recovery, Colombia is well positioned for growth. With a dramatically improved business environment, partnered with innovation and competitive resources, the ‘new’ Colombia is a country to watch in 2010. Colombia’s economic expansion has been higher than the World´s and other Latin American countries. During the past 10 years, the Colombian economy grew by 4 percent per year and has not experienced negative economic growth. In 2009, Colombia’s GDP grew 0.4 percent, a positive growth during the global recession, exceeding all expectations, to be located above the variation shown by the World -2.2 percent and Latin America -2.7 percent. In only eight years, FDI grew 200 percent, exports 174 percent, and international tourism 132 percent. Exports have increased since 2002, growing from $12 billion to $33 billion. In 2002, Colombia received FDI flows of $2.1 billion while in 2009 the FDI flows increased to $7.2 billion. During the last year, FDI flows showed a 32 percent reduction; remarkable figure compared with -42 percent variation of the Region. The number of tourists that visited Colombia has doubled since 2002, from 661,000 travellers to 1.7 million in 2009. Between 2008 and 2009 the number of tourists grew by 17 percent, eight times more than the overall world growth of 2 percent.

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WORLDVIEW COLOMBIA

Exportpropelled, stable growth The tree of life knows that, whatever happens, the warm music spinning around it will never stop. However much death may come, however much blood may flow, the music will dance men and women as long as the air breaths them and the land plows and loves them. – Century of the Wind (Memory of Fire Trilogy, Part 3) Eduardo Galeano Uruguayan writer and chronicler of Latin American history par excellence, Eduardo Galeano’s concluding lines in his magnum opus on the rapacious greed of five centuries of colonial exploitation that all but destroyed a continent, expresses the joie de vivre of Latin America. In recent times, this quintessential resilient spirit, the ability to bounce back from any adversity, is reflected in the resurgent economies of Latin America following decades of political turmoil and economic instability. While Brazil and Argentina, the two largest countries of South America, are in the forefront of these economies, Colombia, has stolen a march over its neighbours with its economy growing rapidly through exportpropelled growth. Unlike its neighbours, Colombia had

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GDP growth: Colombia vs World, 2000-10 (%age change) 8 7 6 5 4 3 2 1 0 -1 -2 -3

6.3

7.5

5.7 4.6 3.1 2.2

4.7 2.5

2.5

2.5

0.4 2000

2001 Colombia

2002

2003

2004

2005

2006

2007

2008

2009

2010*

World

* Forecast: Economic Intelligence Unit (EIU) Source: Invest in Colombia, April-May 2010

Colombia exports, 2000-10 ($ million) 45000

35282

37626

30000

32852

11975

15000 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010*

* Forecast: Economic Intelligence Unit (EIU) Source: Invest in Colombia, April-May 2010

Colombia FDI, 2000-10 ($ million) 12000

10600

10252

8500

8000 7201

4000

2134

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010*

* Forecast: Economic Intelligence Unit (EIU) Source: Invest in Colombia, April-May 2010

Colombia tourism, 2000-09 (million) 1700.5

2000 1451

661.1

1000 0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Note: Including cruise Source: Invest in Colombia, April-May 2010

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Cartagena, city on the northern coast of Colombia and capital of Bolívar Department

enjoyed stable economic growth. During the early 90s the economy was growing quickly in comparison with that of other Latin American countries, and inflation and unemployment were under control. However, government spending and foreign debt soared in the late 90s, the country suffered its worst recession in a century, and labour unrest and internal problems related to the drug trade continued to threaten the country’s economic stability. In addition, reverberations of the global turbulence caused by the Asian financial crisis hit Colombia, too. But here again the turnaround was short and by 2000 the country was on the road to recovery with the export sector leading the way. By 2003, the country’s GDP growth was the highest in Latin America, and the economy continues to improve in part because of government austerity, focused efforts to reduce public debt levels, an export-oriented growth strategy, an improved security situation in the country, and high commodity prices. Colombia is a constitutional republic in northwestern South America, bordered to the east by Venezuela and Brazil, to the south

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by Ecuador and Peru, to the north by the Caribbean Sea, to the northwest by panama, and to the west by the Pacific Ocean. Colombia also shares maritime borders with Venezuela, Jamaica, Haiti, the Dominican Republic, Honduras, Nicaragua and Costa Rica. With a population of over 45 million people, Colombia has the 29th largest population in the world and the second largest in South America, after Brazil. Colombia has the third-largest Spanish-speaking population in the world after Mexico and Spain. Colombia has a long tradition of constitutional government. The liberal and conservative parties, founded in 1848 and 1849 respectively, are two of the oldest surviving political parties in the Americas. However, tensions between the two have frequently erupted into violence. Colombia is very ethnically diverse, and the interaction between descendants of the original native inhabitants, Spanish colonists, Africans brought as slaves and 20th-century immigrants from Europe and West Asia, has produced a rich cultural heritage. This has also been influenced by Colombia's

varied geography. The majority of the urban centres are located in the highlands of the andes mountains, but Colombian territory also encompasses amazon rainforest, tropical grassland and both Caribbean and Pacific coastlines. Ecologically, Colombia is one of the world's 17 megadiverse countries (the most biodiverse per unit area). Agriculture has traditionally been the chief economic activity in Colombia. An extremely wide variety of crops are grown, depending on altitude, but coffee is by far the major crop and its price on the world market has affected Colombia’s economic health. Among the commercial crops, coffee is grown between elevations of 3,000 and 6,000 ft; bananas, cotton, sugarcane, oil palm, and tobacco are grown at lower elevations. Between 6,000 and 10,000 ft potatoes, beans, grains, and temperate-zone fruit and vegetables are grown. Colombia is rich in minerals, including petroleum, natural gas, coal, iron ore, nickel, gold, copper, emeralds, and platinum. The saltworks at Zipaquirá, near Bogotá, are world famous. Hydroelectric potential was

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developed during the 70s and 80s. The manufacturing sector of the economy has expanded greatly in recent decades, although it is heavily dependent on imported materials. Beverages and processed foods, textiles, clothing and footwear, and chemicals are the chief products. Tourism is also a sizable source of income. Oil replaced coffee as the nation’s leading legal export in 1991. Other important official exports include petroleum-related products, coal, nickel, emeralds, apparel, bananas, and cut flowers. Cocaine was the major illicit export, accounting for about 25 percent of foreign exchange earnings. Once most of the raw materials were grown in Peru and Bolivia, but cultivation has increased in Colombia as a result of those nations’ cocaeradication programmes. The drug trade (Colombia also produces heroin and grows cannabis) had brought riches to some, but has seriously disrupted the fabric of Colombian society with its violence. Industrial and transportation equipment, consumer goods, chemicals, paper products, fuels, and electricity lead Colombia’s imports.

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India-Colombia trade crosses $1 bn T he long-standing ties between India and Colombia touched a new high with bilateral trade crossing the $1 billion mark in 2009. India’s formal ties with Colombia go back half a century to 19 January 1959 when diplomatic relations between the two countries was first established. Since then their relationship has been gradually strengthening with more frequent diplomatic visits, and commercial cultural and academic exchanges. Colombia is currently the commercial point of entry into Latin America for Indian companies. In 2006, Oil India invested $425 million in oil production in Colombia. The company plans to participate in contract adjudications with the intention of exploring the Colombian land for gas. In August 2007, the Colombian government

reported that trade between Colombia and India had rapidly increased. India gained $346 million from the exports to Colombia while Colombian exports to India were valued at $62 million. Now India and Colombia have set an ‘immediate’ target to increase bilateral trade to $2 billion. India’s trade with Latin America reached $11.2 billion in 2007, an increase from $9 billion in 2006 and nearly double the 2005 level of $6 billion. Indian exports grew from $4 billion in 2006 to $5 billion, while Indian imports from Latin America increased from $5 billion in 2006 to $6.2 billion in 2007. Trade with India and China represents trade opportunities rather than trade competition for the bulk of Latin American countries. Most of China’s increased exports raise

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WORLDVIEW COLOMBIA

REPUBLIC OF COLOMBIA Capital (and largest city) Official language(s) Demonym Area – total (26th)Water (%) Population – March 2010 est – Density GDP (PPP) 2009 est – Per capita Gini (2006) HDI (2007) Currency

Bogotá Spanish Colombian 1,141,748 km2 8.8 45,393,050 (29th) 40/km2 (168th) $401.966 billion $9,200 52 (high) 0.807 (high) (77th) Peso (COP)

stronger competitive challenges to its Asian neighbours than to the Latin American countries, although some of the latter, such as Mexico, do face substantial Asian export competition. Chinese and Indian growth also opens Latin American export opportunities to new markets. For a few countries, notably Mexico and Brazil, this includes intra-industry trade, though for a majority of Latin American countries, the foremost trade opportunities are to be found in commodity exports. Already, the Asian drivers’ heightened demand for oil and minerals has increased both revenues – through the rising prices of commodities – and direct trade with Latin America. Colombia believes that crossing the $1 billion mark is ‘only the beginning’ and that ‘India will become a great trade and export partner of Colombia.’ Bilateral trade could amount to between $2 billion and $3 billion annually ‘in just a few years’ and bilateral investment could rise to a similar total, with oil and coal, pharmaceuticals, telecommunications technology and financial services outsourcing as preferential sectors. Colombia imported about $14049.86 mil-

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The view from the top terrace at Ciudad Perdida, the lost city in Colombia

lion worth of engineering goods in 2009. India’s exports of engineering goods to Colombia were to the tune of $120.53 million in 2009, down from $151.51 million in 2008. In 2009, India’s share in global engineering imports by Colombia was about 0.86 percent. To date, India and Colombia have signed a score of bilateral agreements, including MoUs in areas such as science, transportation and energy and agreements between regional institutions and chambers of commerce. Bilateral economic ties are clearly on the rise, with the number of Indian companies investing in Colombia’s oil, coal, information technology and biopharmaceutical sectors, among others, increasing from five in 2007 to

26 in 2009. EEPC India show: Colombia’s capital, Bogotá, will be site of EEPC India’s annual feature, INDEE – Colombia, during 4-8 October 2010. The show will be a part of Feria Internacional de Bogotá, the specialised highlight of the most representative Industrial Macro sector in the Andean Region, Central America and the Caribbean. The event brings together the most varied and complete exhibit of industrial machinery, equipment, new technologies, technological advances, supplies, intermediate goods, raw materials and services related to the metallurgy, energy, packaging, plastics, air-conditioning, safety and related services industries.

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WORLDVIEW COLOMBIA

10 FACTS ABOUT COLOMBIA 1. Colombia boasts the best business environment in Latin America: According to the World Bank’s 2010 Doing Business report, Colombia is the top country in Latin America to start or expand a business. This is due to recent reforms that have made the country’s regulatory environment transparent and efficient, from strong property rights and investor protection to efficient court procedures and major tax incentives. 2. FDI is growing at record levels: Between 2002 and 2008, Colombia saw an increase of 400 percent in foreign direct investment. The country expects to see a record $10 billion in total FDI in 2010, as companies increasingly look to tap into Colombia’s traditional sectors, such as exports, mining and infrastructure. Emerging sectors, such as biofuels; IT/BPO; audio/visual production and medical tourism are also new areas attracting investment to the country. 3. The pending free trade agreement between Colombia and the US would create big benefits for the US: As a country that tripled its exports over the past 10 years and is predicted to experience GDP growth of 3-3.5 percent this year, according to the Wall Street Journal, Colombia has made international trade a priority and is very keen to move forward with the pending free trade agreement with the US. The United States has lost corn, wheat and soybean meal sales to Brazil and Argentina in 2009 because those countries had free trade agreements with Colombia and the US did not. With the recent passage of the EU free trade agreement, the importance of passing the US agreement is paramount. 4. Improved security strengthens investor confidence: According to Colombia’s Ministry of Defence, increased military spending and coordination helped to decrease kidnappings by 90 percent and homicides by 45 percent in Colombia between 2002 and 2009. This same period recorded a total of 81 investment projects from 64 US companies including industry giants such as Microsoft, Nike and DirecTV. 5. Innovative infrastructure fuels Colombia’s growing IT market: Colombia developed some of the world’s strongest IT infrastructure in order to keep information and communications secure during previous times of political unrest. Today, the country has double the telecommunications investment as a percentage of GDP – more than any other country in Latin America – and hosts a backed-up and secure Internet infrastructure, with five underwater cables and 212.5 Gbps capacity. Business Monitor International recently predicted Colombia, whose IT industry grew 40 percent between 2005 and 2007, will continue to be one of Latin America’s fastest growing IT markets. 6. Colombia grows green energy from reclaimed plantations: With 6.5

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million hectares of available land, the most productive sugarcane in the world and the most productive palm oil in Latin America, Colombia is dedicated to expanding its biofuels sector. The amount of biofuels required to be mixed with all gasoline and diesel sold in Colombia is set to double to 20 percent by 2020, creating a guaranteed market. This has allowed many rural inhabitants to engage their land in productive use to grow biofuels instead of engaging in illegal activity. 7. Colombia has a health system comparable to Sweden and Belgium: The World Health Organisation recently ranked Colombia’s health system as the best in Latin America and placed it on par with the renowned health systems of countries like Sweden and Belgium. With nearly six million Americans expected to undergo medical procedures abroad in 2010, Colombia is well-poised to capture many of the US’ ‘medical tourists’ looking to capitalise on the country’s lower procedures costs, which are typically 10-30 percent of costs in the US. 8. Colombia is a leader in entrepreneurship: According to a 2009 ranking by the IMD World Competitiveness Centre, Colombia is a regional leader in entrepreneurship, second only to Brazil. With a population of more than 45 million, one of Colombia’s greatest resources is its human capital. The country has the highest labour force growth rate and the second largest availability of skilled labour in Latin America. 9. Colombia’s creative class is spurring new growth in industry and tourism: Colombia’s long history of creativity in literature, art and music (Gabriel Garcia Marquez, Fernando Botero, Shakira) is growing into new opportunities for business and tourism. From the new ‘train to Macondo’ commemorating Garcia Marquez’s famous town in 100 Years of Solitude, to the Carnival of Barranquilla, proclaimed by UNESCO as a Masterpiece of the Oral and Intangible Heritage of Humanity. Creativity is also leading growth in new industries: Colombia’s audiovisual production cluster is emerging as one of the country’s next big opportunities, with animation studios and production houses capitalising on the creative talent of the local people in Colombia’s low-cost environment. 10. Tourism has doubled since 2002: According to the New York Times, Colombia is positioned in the tourist market as one of the most sought-after destinations for 2010. In fact, between 2002 and 2009 the number of foreign visitors arriving in Colombia jumped from 1.1 million to 2.5 million. Every day, Bogota’s international airport welcomes more than 300 international flights and, in order to accommodate rising demand, over the next two years Colombia will add 7,042 hotel rooms to its list of prestigious accommodations.

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Report of the task force on Goods & Services Tax – 6 POLICY MATTERS 13TH FINANCE COMMISSION, GOI

VIII ‘Flawless’ Goods and Services Tax and the autonomy of states 8.1 The design of the GST based on a common base and a uniform rate across states without the power to make any unilateral changes, is viewed by some states as undermining the fiscal autonomy of the States. Therefore, it is argued that the states should agree to a floor rate of tax and should have the flexibility to increase their rates to meet any revenue crisis. 8.2 Full autonomy in the exercise of taxation powers would mean that the Centre or the states, as the case may be, a. Retain the power to enact the tax; b. Enjoy the risks and rewards of ‘ownership’ of the tax (i.e. not be insulated from fluctuations in revenue collections), c. Be accountable to their constituents; and d. Be able to use the tax as an instrument of social or economic policy.1 8.3 Tax autonomy to any level of government is necessary to enable it to design the base and set the tax rates according to its revenue needs. However, it is equally important to ensure that the exercise of these powers do not result in inter-jurisdictional differences in policies and procedures so as to generate additional economic distortions, create negative externalities, or impose higher compliance and enforcement burden. 8.4 In general, the states would like to have some degree of control to design the base and set the rates as an instrument to promote various social and economic policy objectives. However, cross-country experience

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The Report of the 13th Finance Commission’s Task Force on Goods & Services Tax (GST) provides a complete overview of the proposed tax system that among other things is expected to enhance productivity and accelerate growth. The Task Force has recommended delaying the introduction of the GST system by six months to October 2010 because of inadequate preparedness for its scheduled introduction on 1 April 2010. Here we bring you the sixth and final instalment of the report. The earlier instalments can be found in previous issues of IndianEngineeringExports shows that there is complete disillusionment with the use of the tax system as a tool to promote various social and economic objectives by allowing exemptions and incentives. Therefore, tax reforms undertaken across countries since the mid-1980 have focussed on redesigning the tax system so as to restrict its role to revenue collection. There is almost unanimity amongst fiscal experts on assigning a limited role of revenue collection to the tax system and using the direct transfer mechanism for achieving the various social and economic objectives. Given this new strand of economic thinking, the ability to use the tax system as a tool for achieving various social and economic objectives should cease to be a measure of tax autonomy. 8.5 In the past under the sales tax regime in the states, the flexibility to use the tax system as a tool for achieving various social and economic objectives has generated economic distortions and also triggered a race to the bottom. Further, if the states are allowed the autonomy to increase the rates by setting the SGST rates as the floor rates, they would have a tendency to opt for this lazy option rather

than improve their enforcement mechanism. Such increase in rates would mean a greater incentive to evade which, in turn, would make industries in competing states uncompetitive. It would also trigger tax-induced migration. Consequently, the decision to increase the rate would generate negative externalities, which must necessarily be curbed. 8.6 Hence, it is only appropriate that in a federal structure with overlapping powers to tax goods and services, Governments across levels cease to enjoy the autonomy to design the base, set the rates and the flexibility to use the tax system as a tool for achieving various social and economic objectives. In the context of the federal structure of India, what is relevant is overall fiscal autonomy rather than tax autonomy per se. Since states would continue to have the full freedom to promote various social and economic objectives through direct transfers, effectively, there would be no loss of fiscal autonomy of the states. 8.7 The design of the ‘flawless’ GST, as recommended by us in the preceding chapters, is essentially an attempt at absolute harmonisation of the tax base, tax rates and tax

INDIAN ENGINEERING EXPORTS


POLICY MATTERS 13TH FINANCE COMMISSION, GOI

infrastructure (i.e. the administration and compliance system) across Centre and all states. As discussed above, harmonisation of the tax base and the tax rates will eliminate the distortionary impact on economic efficiency and equity arising from inter-jurisdictional differences. Further, such harmonisation will enable consequent harmonisation of the tax laws and the administration and compliance systems. 8.8 Harmonisation of tax laws is critical. Variation in the wording and structure of tax provisions can be an unnecessary source of confusion and complexity, which can be avoided if the Centre and all the states adopt a common GST law as in the case of the Central Sales Tax or agree to separately legislate an identical GST law. In either situation, there would be harmonisation in respect of critical elements like common time and place of supply rules, common rules for recovery of input tax, valuation of supplies, invoicing requirements, tax interpretations and rulings regarding classification of goods and services, determination of what constitutes taxable consideration and definition of export and import. 8.9 Administration and compliance is an area where the need for harmonisation is the greatest, and where Centre-state or interstate variations are unlikely to serve any social or economic policy objective. This includes items such as the taxpayer registration system, taxpayer identification numbers, tax forms, tax reporting periods and procedures, invoice requirements, cross-border trade information systems and IT systems. Harmonisation of these elements would result in significant savings in costs of implementing the GST (by avoiding duplication of effort in each government), as well as recurring savings in compliance costs. Harmonisation would also permit exchange of information between different levels of government so as to enable effective monitoring of cross-border transactions. A common tax identifier number across states and the Central Government is a key element in the

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efficient exchange of information. 8.10 Harmonisation of the GST tax base, tax rate and administrative and compliance systems should be viewed as an imperative for optimising the efficiency and productivity of GST across jurisdictions in a federal structure. All jurisdictions will be worse off without harmonisation. Therefore, it should not be perceived as eroding the fiscal autonomy of the Centre or the states. 8.11 If harmonisation across Centre and all states is envisaged, what should be the institutional mechanism to usher and maintain such harmonisation? At present, the responsibility for designing the initial structure of the GST has essentially been left to the Empowered Committee of State Finance Ministers and official-level representatives of the Central Government. This body is now internationally recognised as an important institutional arrangement which has rendered yeoman service in substantially furthering the cause of indirect tax reform in the country. However, there is also a need to maintain stability and integrity in the structure of the GST to ensure that no distortions creep into the indirect tax system. Therefore, the existing mechanism for arriving at a collective decision on the structure of the GST should be permanently institutionalised so that changes in the initial design of the GST are collectively agreed and implemented by both the Centre and the states. 8.12 In view of the above, we recommend that the Empowered Committee of State Finance Ministers may, upon the introduction of the GST, be transformed into a permanent constitutional body known as the Council of Finance Ministers. This Council shall comprise of the Union Finance Minister and all State Finance Ministers. The Union Finance Minister would be the Chairman of this Council. 8.13 The Council should be responsible for any modification in the initial design of the dual GST and regulating the indirect tax system in the country. The initial design of the dual GST should be approved by the

Chairman and three-fourth of the State Finance Ministers. Thereafter, any change in the structure of the GST (both base and the rates) should be allowed to be carried out only if the Chairman and two-thirds of the State Finance Ministers agree to do so. Consequently, neither the Centre nor any state will have the authority to unilaterally make any change in the agreed design of the GST. However, in the event of a crisis, the member state or the Centre may take immediate steps to impose a surcharge subject to ex-post facto approval by the Council within one month. Further, such surcharge should not be allowed to remain in force beyond a period of one year. 8.14 This Council should, in due course, have a permanent secretariat of its own in New Delhi. 8.15 The proposed mechanism will also ensure that all changes are thoroughly analysed and debated before being implemented. More importantly, since both the Centre and the states would surrender their individual autonomy to change the structure of the GST to the proposed constitutional body, the existing balance of federal fiscal powers will continue to be maintained. 8.16 Further, with a view to compensating for the perceived erosion in the tax autonomy of the states, we also recommend that there should be an increase in the formula-based devolution to the states.

IX Incentivising states to adopt GST 9.1 The movement from sales tax to VAT at the state-level entailed the adoption of uniform RNR rate by all states. The RNR rate is the weighted average of rates across states. Since there was no significant expansion in the base, it implied that states with average weighted rate higher than the RNR would lose revenue while those below it would gain revenue. Hence, the states demanded compensation for adopting VAT. The states have now also demanded compensation for any loss that might be incurred as a result of the shift from the existing indirect tax system at

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POLICY MATTERS 13TH FINANCE COMMISSION, GOI

the state-level to the GST-level. 9.2 States have expressed concern that the RNR for state GST may be revenue neutral at the aggregate-level but not necessarily for all individual states. It has, therefore, been suggested that if the states were to be denied the flexibility of upward adjustment to the tax rates, they should be compensated for the revenue loss estimated on a transparent basis. 9.3 The RNR calculated by us in the preceding paragraph is estimated to be 6 percent if all the taxes listed in paragraph are subsumed. Our calculations of revenue estimates, based on estimated C-efficiencies of the existing state-level indirect tax structure and of the proposed state GST, for each state indicates that there would be no revenue loss for any state on account of the switch over to GST at the estimated RNR rate of 6 percent and existing level of compliance. This is primarily due to the fact that the change entails significant increase in the tax base for the states. In fact,

we estimate that there would be significant revenue gain at 7 percent RNR as recommended by us.2 9.4 The Group recognises that the adoption of the GST would create significant positive externalities to impact GDP and various other macroeconomic variables. This would result in reduced cost of economic management to the Central Government. Hence, it is logical that the Central Government shares with the states such positive externalities. 9.5 Some states have expressed their lack of confidence in the existing compensation arrangement for revenue loss to the states. It has been suggested that the compensation mechanism, to be credible, must be administered by a body independent of the Finance Ministry in which the state Governments have a say in governance. The suggestion merits consideration. 9.6 Therefore, we recommend the following: i) A GST Compensation Fund should be created under the administrative control of the

Council of Finance Ministers. ii) The Central Government shall transfer to the GST Compensation Fund a minimum sum of Rs6,000 crore per annum over the next five years (i.e. a total amount of Rs30,000 crore) if, and only if, the states: a. introduce the ‘flawless’ GST as recommended by us; and b. follow the road map, as suggested by us, for its introduction. iii) The amounts in the Fund should be used only for the following purposes: a. to compensate the states for any revenue loss on account of the adoption of the ‘flawless’ GST; b. the balance, if any in the Fund, to be carried forward to the subsequent year; c. the balance, if any remaining at the end of the fifth year, to be distributed amongst the states on the basis of the same formula used for distributing resources in the divisible pool. iv) The amount will be transferred in quarterly instalments.


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v) The amounts shall be disbursed by the Council on the basis of the recommendations by a three-member Compensation Committee comprising the Secretary, Department of Revenue, Government of India, Secretary to the Council and any fiscal expert appointed by the Central Government for this purpose. vi) No contribution to the Fund shall be made by the Central Government in any year in which the states fail to adhere to the roadmap for implementation of the GST. vii) The methodology to be used for estimating the revenue loss and the compensation shall be decided by the Council. 9.7 These recommendations will serve as an incentive for the states to adopt the flawless GST and also ensure that the payment for compensation, if any, is legitimate and transparent. 9.8 One of the lessons drawn from the implementation of VAT at the state-level is the frequent tendency by the states to deviate from the collectively agreed position relating to the base and the rates. This creates significant tax induced distortions in economic behaviour across states. Further, as stated earlier, it also creates negative externalities. Therefore, it is imperative to establish a mechanism whereby the defaulting state is made liable to pay for the negative externalities. Accordingly, we recommend the following: i. Any state which deviates from the GST base or rates, collectively agreed upon, without the authority of the Council, should be liable to such penalty for the year, as may be recommended by the Thirteenth Finance Commission. ii. If the deviation is for a period less than a year, the state will be liable for a proportionate amount of penalty attributable to the period of deviation. Similarly, if the deviation is for a period more than a year, the state will be liable for the completed years and the proportionate amount relating to the remainder period. iii. The amounts collected in penalty shall be deposited in the GST Compensation Fund for

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One of the lessons drawn from the implementation of VAT at the state-level is the frequent tendency by the states to deviate from the collectively agreed position relating to the base and the rates. This creates significant tax induced distortions in economic behaviour across states. Further, as stated earlier, it also creates negative externalities. Therefore, it is imperative to establish a mechanism whereby the defaulting state is made liable to pay for the negative externalities formula based devolution to the states. 9.9 This mechanism will provide symmetric treatment of positive and negative externalities whereby creation of positive externalities will be rewarded and negative externalities will be penalised.

X Goods and Services Tax – the way forward 10.1 The introduction of the Value Added Tax at the state-level was discussed over a prolonged period of more than a decade before implementation. Given the fact that the reform of the indirect tax system is critical to any effort to increase efficiency and economic growth, such prolonged period of discussion on issues in respect of which there is adequate

well-documented international experience is costly and should, therefore, be avoided. In spite of such prolonged period of discussion, the state VAT regime in the last four years has witnessed many states deviating from the classification and the rates agreed upon in the White Paper of the Empowered Committee, released in January 2005. 10.2 Similarly, the discussions on the introduction of a comprehensive dual GST, both at the Centre and state-level, have been in progress since early 2006. It is unfortunate that no agreement on the GST has yet been reached even though the target date for its introduction i.e. 1 April 2010, is less than six months. 10.3 The Central Government has entered into a number of free trade agreements. As these agreements are operationalised, it is necessary to optimise the efficiency and competitiveness of Indian industry. There is no headroom for pursuing distortionary policies. To the extent, the distortions are induced by the indirect tax system, there is an urgent need to reform the same by adopting a flawless Goods and Services Tax along the lines recommended in this Report. The adoption of a flawless Goods and Services Tax is critical to the survival of the Indian industry in the face of increasing international competition consequent to a number of free trade agreements entered into by India. 10.4 Hitherto, the approach of the Central Government has been to act as a catalyst in the process of the design of the GST. This responsibility has essentially been left to the Empowered Committee of State Finance Ministers and official-level representatives of the Central Government. Since the design of the GST will also impact the indirect tax system of the Central Government, it is necessary for the Central Government to play a more proactive role in this effort. Towards this, the leadership of the Union Finance Minister would be vital. This will provide the necessary impetus to the process of ‘grand bargaining’ for the GST.

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10.5 While the Council is engaged in the process of designing the GST, the Council should approve the draft of the amendment to the Constitution to the effect that the Centre and the states shall exercise concurrent jurisdiction to subject all goods and services (other than SIN-goods) to a consumption type value-added tax based on destination principle where exports will be zero-rated and all imports will be subject to the levy like any other goods and services domestically produced and consumed. Further, it should also provide that the base for the levy should be common for both the Centre and the states and there would be a legislated agreement amongst the states and the Centre to: (a) adopt uniform classification, (b) adopt uniform rates, (c) not modify the classification or the rates except with the agreement of all the states and the Centre, and (d) provide for other essential common features like zero-rating of (or credit by importing state for) inter-state sale of goods. This could be on the lines of the GST legislation in Australia, under which all the states and the Commonwealth (the Centre) have to agree before any change in the rate or the base of GST can be implemented. 10.6 The implementation of the GST is scheduled for 1 April 2010. However, given the fact that the discussion paper on GST has not yet been released for public debate, it is unlikely that the Centre and the states would be able to complete all legislative and administrative processes before 1 April 2010. Therefore, it would be appropriate for the Council to postpone the implementation by six months to 1 October 2010. However, the Council should release a timeline of various activities for introduction of GST simultaneously with the announcement for postponement. This will enable all stakeholders to monitor the progress and ensure that the new implementation date is not missed out. The new timeline starting 1 January 2010 is contained in Annexures. 10.7 The SGST is being designed by the Empowered Committee to subsume the

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‘EC-taxes’3 only. One of the main elements of the ‘flawless’ GST recommended by us is that all taxes on goods and services, levied by the Centre or the states, should be subsumed in the GST. Therefore, we have recommended that the following other taxes levied by the states on goods and services should also be subsumed: a. Stamp duty; b. Taxes on vehicles; c. Taxes on goods and passengers; and d. Taxes and duties on electricity. 10.8 There is also a view amongst states that while they agree that these taxes should eventually be subsumed, they would like to gradually move in that direction rather than adopt a ‘big bang’ approach. 10.9 The introduction of the GST should be viewed as the last mile in the reform of the indirect tax system of this country initiated in 1986 with the introduction of the MODVAT. The present system of taxes on goods and services is an outcome of a gradual approach to tax reform over the last 23 years. Consequent to this approach, the country has undoubtedly lost out on potentially higher economic growth, higher real wage rates, fiscal consolidation and consumer welfare. All stakeholders other than the oligarchs, both within and outside the system, stand to gain from a swift comprehensive changeover to the GST. The multitude of the poor will gain from this reform measure more than any other stakeholder. To the extent the switchover is staggered, the potential gains from the comprehensive GST would remain unrealised thereby adversely impacting the poor. We therefore, recommend that all taxes on goods and services, whether levied by the Centre or the states, should be subsumed in the GST in the very first year of its introduction. 10.10 However, if for some political economy reasons it is considered expedient to introduce the GST in a phased way, we recommend the phasing in the following manner: a) In the year 2010-11, all elements of the Flawless GST recommended by us whereby

i. the single CGST rate should be 5 percent and the corresponding SGST rate should be 7 percent; and ii. transactions in immoveable property (i.e. real estate and housing services) should be brought within the fold of GST; and iii. stamp duty may not be subsumed but the rate of stamp duty in all states should be calibrated so as not to exceed 4 percent. As a result, transactions in real estate will be subject to a dual levy like in the case of SINgoods; b) In the year 2011-12, same as (a) above, with the modification that the rate of stamp duty should be reduced to 2 percent; and c) In the year 2012-13, same as (a) above, with the modification that: i. stamp duty should be eliminated and replaced by a Registration Fee at a specific rate; ii. the revenues attributable to 2 percentage point out of the 7 percentage point of SGST should be set apart for devolution to the thirdtier of government and the revenues from the balance 5 percentage points will remain with the state government so that the third-tier of government have a interest in the efficient functioning of the GST and do not have to impose any cascading taxes like cess, entry tax or Octroi.4 10.11 Further, we also recommend that the phased programme for introduction of the GST as outlined above should be incorporated in the GST legislation so that there is no uncertainty on the evolution of the GST which will enable trade and industry to appropriately structure their business. 10.12 We do not envisage any loss of revenue at the rates of CGST and SGST recommended by us. However, the rates being sufficiently low, we expect more than normal growth in revenues through better compliance and ease of administration. These low rates will also provide sufficient fiscal space to the Government to meet any contingency which may arise in the future by raising the rates as was done in Japan, Singapore and New Zealand.5 10.13 The Central Government and state INDIAN ENGINEERING EXPORTS


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governments must come together in national interest to build a consensus on the GST and adhere to the new deadline of 1 October 2010 for rolling out GST. Given the strategic importance of this game-changing reforms, the country can little afford any delay.

XI Conclusion 11.1 The taxation of goods and services in India has, hitherto, been characterised as a cascading and distortionary tax on production resulting in misallocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. It is well-recognised that this problem can be effectively addressed by shifting the tax burden from production and trade to final consumption. A well-designed destination-based value-added tax on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction. 11.2 The efficiency of the VAT enhances with increase in the purity of the GST model. The most important ten elements of a pure GST are the following: a. The base should extend to all goods and services including immovable property; b. There should be a single low rate; c. The tax should be destination-based; d. The tax should be designed on invoicecredit method; e. Full and immediate input tax credit in respect of capital goods; f. The GST must replace all transaction-based taxes on goods and services and factors of production. g. There should be seamless flow of the tax through all stages of production and distribution so as to stick on ‘final’ consumption; h. The exports should be zero-rated and imports should be fully taxed; i. There should be a threshold exemption for small dealers;

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j. Full computerisation of the compliance and administrative systems. 11.3 In the light of the above, we have recommended a ‘flawless’ GST in the context of the federal structure which would optimise efficiency, equity and effectiveness. The ‘flawless’ GST is designed as a consumption type destination VAT based on invoice-credit method. It provides for a comprehensive base including financial services and immovable property. To the extent that there are exemptions, albeit limited to items covered for distribution through the public distribution system, and health and education services, the purity of the GST is diluted. A threshold exemption of Rs10 lakh has also been provided for small businesses. Imports into the country are proposed to be taxed in the same manner as domestically produced goods. Like intermediate inputs, full and immediate credit for tax paid on capital goods will also be provided. Further, it also provides for a single rate of tax of 12 percent for all general goods and services across all states, comprising of 5 percent by the Centre and 7 percent by the states.6 However, products of high value like gold and platinum will be subject to tax at the rate of 1 percent each by the Centre and the states and exports will be zero-rated. 11.4 There is empirical evidence to suggest that the switchover from the present distortionary taxation of goods and services to a ‘flawless’ GST will, amongst others, increase productivity of all factors of production and hence enhance GDP. The switchover has also been analysed to be pro-poor and, therefore, further the cause of poverty reduction. Further, in the Indian context, a dual VATtype tax concurrently levied by both the Centre and the states would enable the creation of a common market. 11.5 Given the benefits of the changeover to the flawless GST, it would be economically rational for all levels of government to introduce and successfully implement the flawless GST and for the Central Government to invest in incentivising the state government

to adopt the flawless GST. We have, therefore, recommended that the Central Government should provide a sum of Rs30,000 crore over the next five years which will be used to compensate the states for revenue loss, if any, and the balance for distribution between the states on the basis of the same formula applicable for tax devolution to the states. 11.6 The implications for fiscal management are far-reaching. It will significantly improve fiscal management through higher tax buoyancy. While the RNR for state-level ‘TF-taxes’ (including stamp duty) is only 6 percent, we have allowed them a higher rate of 7 percent along with the flexibility to phase out the stamp duty over a period of next three years. This has the potential to increase the combined tax revenues of states by an estimated amount of Rs70,000 crore. In addition, we have also recommended that the states should be provided with an additional Rs30,000 crore as incentive to adopt a ‘flawless’ GST. Therefore, the switch over to the flawless GST will augment the combined resource base of the states by an aggregate sum of Rs100,000 crore.7 11.7 We recognise that the levy will be imposed and enforced by a large number of governments. Therefore, there would be constant pressure on states to deviate from the pure VAT model and trigger harmful tax competition. This would jeopardise the sustainability of the benefits from the implementation of the ‘flawless’ GST. Therefore, it is also necessary to establish an institutional mechanism, which would be responsible for making any change in the design and structure of the VAT. Our recommendation to establish a Council of Finance Ministers is intended to subsume the independent powers of the both the Centre and state governments to levy tax on goods and services in favour of collective exercise of the powers. Therefore, there is no exacerbation in the vertical imbalance in the fiscal powers. 11.8 The First Discussion Paper released by the Empowered Committee of Finance

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Ministers on 10 November 2009 envisages an extremely diluted form of GST under which, inter alia: (i) a number of cascading taxes including purchase tax will continue to be levied by the states; and (ii) the base is considerably eroded on account of the proposed continuation of the exemptions. We are also given to understand that the Empowered Committee is considering a two-rate structure for general goods and services (other than high-value goods).The design of the GST as envisaged by the Empowered Committee is, therefore, a significant dilution of the ‘flawless’ GST. Consequently, the potential economic benefits from a switchover to the flawless GST, which we have discussed in the foregoing chapter, would not be realised. 11.9 We have recommended that the implementation of the GST should be postponed to 1 October 2010. We believe that it should be possible to adhere to this timeline. The benefits from the switch over to the GST are contingent upon the purity of the GST design. In the context of VAT, international experience shows that any design-related ‘VAT mistakes are very hard to rectify.’ Therefore, it must be ensured that there are no designrelated mistakes at birth. However, if there is a tradeoff between the timeline and the design of the GST, the dilemma must be resolved in favour of design. 11.10 Further, in order to implement the ‘flawless’ GST it would be necessary to undertake constitutional amendments to enable both the Centre and the states to exercise concurrent jurisdiction over the taxation of all goods and services, creation of the proposed Council of Finance Ministers and assignment of part of the GST proceeds to the third-tier of government. These amendments must, inter alia, provide that the taxation of goods and services by both the Centre and the states should be a consumption-type, destination-based GST. 11.11 The introduction of the ‘flawless’ GST is one of the most important reform agenda which can provide a new impetus to Indian industry and inclusive growth. It is an eco-

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nomic game changer. All stakeholders must unite and develop the necessary will to cooperate in introducing the flawless GST. It would be worthwhile to make greater political investment in this endeavour.

ANNEXURES Treatment of immovable properties under Goods and Services Tax The case for including the real estate sector in the tax base for the GST rests on a number of competing reasons. Firstly, the construction and exploitation of real estate comprises one of the larger sources of gross domestic product. Therefore, any exclusion of the real estate sector would lead to significant reduction in the tax base. This would lead to an increase in the GST rate for other sectors thereby distorting economic efficiency and incentive for compliance. Secondly, expenditure on housing also constitutes a significantly large proportion of total personal consumption expenditure. Therefore, the exemption of the housing sector from the GST base would distort the consumption pattern. Further, it would also undermine vertical equity in as much as consumption of housing services is relatively high in the case of the rich. Thirdly, real estate is subject to multiple taxation at both levels of government. At the Central Government-level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the state-level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such transactions is lost and producers of inputs are also encouraged to suppress such transactions. The cumulative effect is to incentivise transactions in black money. At the state-level, the taxes on the real estate sector include ‘sales tax’ on works contract, state-level VAT on various inputs used in the construction of real estate, stamp duty and

registration fee. Registration and stamp duties exhibit the same distortionary cumulative and cascading effects as excises. The problem is further compounded by the fact that in most states, the statutory rates of stamp duty on immovable property transaction are high. Therefore, the effective rate on value addition is exorbitant, thereby encouraging underreporting of transactional value and evasion of stamp duty. Since stamp duties are directly or indirectly related to other taxes, any stamp duty evasion triggers a similar adverse response to compliance with other taxes. As with other transaction taxes, it generates a bias in favour of not selling, and inhibits the development of a liquid secondary market. In the context of a distortionary tax regime governing the real estate industry in India, there is a strong tendency for this industry to remain outside the organised sector and consequently the regulatory framework. Therefore, it serves as a breeding ground for tax evasion and criminal activities. Fourthly, rationalisation of the tax regime governing the real estate industry could yield numerous benefits: improve tax compliance in the property tax, which is critical for the revenue base of local government, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing. At a conceptual level, under a VAT, sales, rentals, and rental values of immovable property would be taxable and credit would be available for the VAT embedded in purchases. Immovable property that generates housing services should be treated in the same manner. The theoretically most attractive solution would be to register all legal persons, who own or buy residential real estate, for VAT purposes. By purchasing a dwelling, these persons would become producers of housing services. In their role as producers, they would subsequently sell the housing services to consumers. These consumers could be lessees who buy the services for consideration, i.e. a rental charge. It is also possible that

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producers would put the dwelling at their own disposal. In other words, as ownerproducer they would ‘sell’ the housing services to themselves in their role as occupierconsumers. Therefore, the purchaser of an immovable property could use the housing services produced from ownership either for self-consumption or for ‘sale’ by renting out the property. The VAT consequences of these events are as follows. On purchase of a bundle of housing services in the form of dwelling, the registered taxpayer pays tax on the purchase price, but at the same time, he is entitled to a tax credit (and refund, if due) for the same amount. If he sells the housing services to lessee, he would have to charge VAT on the amount of the rental. The lessee, being an unregistered consumer, would not be able to pass the tax on; he would be stuck with it just like consumers of other services. Similarly, in his role as owner-occupier, the producer of

housing services would ‘charge’ VAT on these services, whose value equals the rental value of the dwelling rendered to himself as consumer. And, like the lessor, he would have to remit that tax (net of any tax on inputs, such as repair and maintenance services) to the government. In practice, the registration of all owneroccupiers and the computation of all imputed rental values present formidable administrative problems and are, therefore, not feasible. If imputed rental values cannot be taxed, the taxation of rental charges would appear to favour owner-occupiers over lessees. Further, the practical difficulties of taxing small landlords might be severe. Therefore, as a second-best approach, it would be appropriate to provide a threshold exemption for GST, which would ensure that the large majority of small landlords are outside the scope of GST. Since the imputed rental values in the case of self-owners

would predominantly be below the threshold exemption limit, it would be desirable from an administrative aspect to exclude imputed rental values in the case of selfowners from the scope of GST. The treatment of housing under a VAT like GST regime can be designed following either the comprehensive taxation method or one of the two variants of the exemption method. The treatment of transactions in immovable property and real estate/housing services under the three methods is summarised in Table 1 (next page). Under the comprehensive taxation method, all new properties (both residential and commercial) constructed after the introduction of the VAT are liable to tax on construction/first sale of the building on the reasoning that the cost of construction or the price of first sale represent the present discounted value of the flow of imputed rental services over the life of the property.


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Table 1 Nature of transaction

Comprehensive taxation

A

Exemption method (variant-A)

(variant-B)

A. Existing residential property stock i. Sale

T

T

E

ii. Rental charges

T

E

E

iii. Imputed rental values

E

E

E

iv. Alteration and maintenance

T

T

T

i. Construction/ First Sale

T

T

T

ii. Resale

T

T

E

iii. Rental charges

T

E

E

iv. Imputed rental values

E

E

E

v. Alteration and maintenance

T

T

E

i. Sale

T

T

T

ii. Rental charges

T

E

T

iii. Imputed rental values

E

E

E

iv. Alteration and maintenance

T

T

T

i. Construction/First Sale

T

T

T

ii Resale

T

T

T

iii. Rental charges

T

E

T

iv. Imputed rental values

E

E

E

v. Alteration and maintenance

T

T

T

E. Inputs (both goods and services) used for construction

T

T

T

B. New residential property

C. Existing commercial property stock

D. New commercial property

Thereafter, the rental charges for leasing of such properties is also liable to VAT with the landlord being entitled to input credit on the tax paid on construction/purchase of the building. However, if the property is owneroccupied, no VAT is applicable on imputed

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rental value of the house. Correspondingly, the owner is also not entitled to input tax credit. Upon resale of the property, VAT is realised on the full resale value and input credit to the extent not utilised against rental income is allowed as a deduction. If the input

credit is greater than the VAT on resale value, the excess is ignored and no refund for such excess is allowed. As a result, VAT is payable on the margin earned on sale of the property, i.e. the difference between the sale price and the cost of procurement and improvements

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thereto. It applies only to enhancement in the value of the property. The treatment in respect of resale of properties built prior to the introduction of VAT would be the same with the modification that no input tax credit is allowed in respect of VAT, which is paid at the time of its purchase. Further, VAT is also levied on the value of the supply of all goods and services for construction, alteration and maintenance of an immovable property. The comprehensive method, as its name suggests, is extremely wide in its scope. Firstly, it extends to the consumption of existing stock of properties, as well as to any unanticipated future increases in the rental value of the new properties. Secondly, this method also effectively entails full taxation of imputed rental value of owner-occupied properties. New properties attract tax on their full capital value (i.e. the purchase price) at the time of purchase, for which no

deduction is allowed to the owner during the period of self-occupation of the property. Thirdly, the existing properties also attract tax on their full capital value at the time of resale. Further, this method simplifies legislation in as much as no distinction is required to be made between residential or commercial properties. The case against the comprehensive method is essentially built on the following considerations. Firstly, under the method landlords would tend to register themselves to avail of credit in respect of input tax paid on construction/purchase of the property thereby increasing the administrative burden of dealing with a large number of small registrants. However, this problem is highly exaggerated in the context of a reasonably moderate threshold exemption for small businesses whereby most small landlords would remain exempt. Secondly, application of tax on resale of dwellings would

require the owners to keep track of input taxes paid on the acquisition of the dwellings, on improvements undertaken over the period of their ownership and input credit availed against VAT payable on rental value. Further, in many cases, there are frequent changes in the use of the dwelling as owneroccupied residence or rental dwelling. Since input tax credits are allowed only for houses used for rental purposes, these changes in the usage of the dwelling would require special rules for appointment of the input tax credits resulting in increased administration burden for the tax office. However, these problems are surmountable by not allowing any credit for input tax paid on construction/purchase of the property or improvement thereto against VAT payable on rental value. The credit for such input tax can be allowed only at the time of resale, after adjusting the same for inflation. Thirdly, in the case of existing stock of properties, the


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tax applies on the full resale value. This may be appropriate only where the existing properties did not previously bear the taxes that were being replaced by the VAT. If indeed substitute taxes (though of the cascading variety) are applied to some or all components of the existing properties, subjecting them to full taxation again under VAT would amount to double taxation. This can be resolved by allowing credit for the taxes already paid or levying the VAT only to enhancement in the value of the property. Under the Variant-A of the exemption method, like in the comprehensive taxation method, all new properties (both residential and commercial) constructed after the introduction of the VAT are liable to tax on construction/first sale of the building. However, both the rental charges for leasing of such properties and the imputed rental value are exempt with no benefit for input tax credit whatsoever. Upon resale of the property, VAT is realised on the full resale value and input credit for tax paid on construction/purchase of the property is allowed as a set off. If the input credit is greater than the VAT on resale value, the excess is ignored and no refund for such excess is allowed. As a result, like in the comprehensive taxation method, the VAT on resale is payable only on the margin earned on sale of the property. The treatment in respect of resale of properties built prior to introduction of VAT is the same with the modification that no input tax credit is allowed in respect of VAT, which is paid at the time of its purchase. Further, VAT is also levied on the value of the supply of all goods and services for construction, alteration and maintenance of an immovable property. The Variant-A is economical neutral between rented properties and owner occupied properties in as much as both the actual rent and imputed rent is exempt. Similarly, this method is also neutral across properties constructed before and properties constructed after the introduction of VAT since resale of the property is liable to VAT. The

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administrative and compliance difficulties are similar to those faced under the comprehensive taxation method with the modification that the number of landlords seeking registration would be relatively small since actual rent is exempt. However, administrative complexity would increase in case of mixed use of properties, i.e. where the building is partly used for residential and partly for commercial rentals or where the use of the unit changes between commercial and residential use since this would required special rules of apportionment of the input tax credits. Further, in many cases, along with the renting of the unit, various related services such as utilities, furnishings, meals and maid services are also provided. Special rules would need to be framed to segregate residential rentals from the related supplies. Under Variant-B of the exemption method, a distinction is made between residential and commercial properties. The commercial properties are treated in the same manner as under the comprehensive taxation method. In the case of residential properties, VAT is levied at the time of construction/first sale of such properties which are constructed after the introduction of VAT. All resale of properties, whether constructed before or after the introduction of the VAT is exempt. As a result, the scope of VAT does not extend to existing properties. Further, VAT is also levied on the value of the supply of all goods and services or construction, alteration and maintenance of an immovable property. Variant-B is extremely narrow in its scope since sale and resale of both existing and new residential properties, rental value and imputed rent are exempt. This can be highly distortionary since the benefit from such exemption would depend on the mix of taxable and non-taxable inputs used in construction. Further, a distinction would also need to be made between residential and non-residential properties to allow for the exemption and input tax credit. This would add to the complexity in the tax

administration. The real estate sector should be integrated into the GST framework keeping in view the implications of the different methods.

Terms of Reference of the Task Force The Task Force shall examine the impact of the proposed implementation of the Goods and Services Tax (GST) with effect from 01.04.2010. For this purpose, it shall examine, inter alia, (a) the GST model best suited for the country; (b) the modalities of the implementation of GST including threshold limits, composition limits, treatment of inter-state transactions, place of supply rules; (c) the potential tax base of the GST as exhaustively as possible and determine an appropriate revenue neutral rate for the Centre and the states; (d) suggest ways to incentivise states to adopt a model GST; and (e) recommend a framework for administering the GST including payment of compensation, monitoring of compliance and institutional mechanism for making any change in the initial design of the GST. Notes 1. See Poddar, Satya and Ehtisham Ahmad (2009). 2. Our detail calculations can be made available on request. 3. See para 2.11. 4. We are aware that this aspect will also require to be included in the proposed amendment to the Constitution for introduction of GST. 5. Japan increased the VAT rate from 3 percent to 5 percent, Singapore from 3 percent to 7 percent and New Zealand from 10 percent to 12.5 percent. 6. However, products of high value like gold and platinum will be subject to tax at the rate of 1 percent each by the Centre and the states and exports will be zero-rated. 7. This is equivalent to 2 percent of GDP.

INDIAN ENGINEERING EXPORTS


homeaffairs

1 EEPC at home … It was business as usual in the EEPC offices. (1) EEPC India Vice Chairman Anupam Shah addresses a seminar on SME Credit Rating & Financing Options in Kolkata; and (2) a section of the participants. (3) EEPC India Southern Region organised a seminar on Trade Agreements between India and various Trade Blocs in Chennai, and (4) EEPC Vice Chairman Mahesh K Desai addressing a session on INDEE Colombia in Hyderabad. (5) In Delhi, EEPC India Senior Deputy Director N Jumde speaking at a seminar organised by FICCI. (6) EEPC India held its adjourned AGM in Kolkata. In the picture are former EEPC India Chairman P K Shah, Vice Chairman Anupam Shah, Executive Director R Maitra and AED & Secretary Bhaskar Sarkar.

… and abroad

2

3

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AUGUST 2010

(7) Members of the Mount Prospect Economic Development Council visited EEPC India’s office in Chicago. (8) EEPC India Senior Assistant Director Shakti Nath Mukherjee at the EEPC India booth in ITMA Asia, Shanghai, and (9 & 10) views of the fair.

4 INDIAN ENGINEERING EXPORTS


homeaffairs

INDIAN ENGINEERING EXPORTS

5

6

8

7

10

9 AUGUST 2010

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EEPC INDIA CALENDAR OF EVENTS

FAQs

What is ATA Carnet?

Date

Event

Venue

14-19 September 2010

India Pavilion at Automechanika Frankfurt 2010

Frankfurt, Germany

21-24 September 2010

India Pavilion at InnoTrans 2010

Berlin, Germany

4-8 October 2010

INDEE-2010 Exclusive Engineering Exposition (coinciding with Feria International De Bogota 2010)

Bogota, Colombia

18-30 October 2010

Multi-Product Trade Delegation to Russia, Ukraine and Belarus

Moscow, St. Petersburg, Nizhniy Novgorod, Kiev and Minsk

17-20 November 2010

India Pavilion at MEDICA 2010

Dusseldorf, Germany

25-28 November 2010

India Pavilion at MACTECH 2010

Cairo, Egypt

1-4 December 2010

India Pavilion at EUROMOLD 2010

Frankfurt, Germany

8-11 January 2011

India Pavilion at ARAB PLAST 2011

Dubai, UAE

20-24 February 2011

India Pavilion at SIMA 2011

Paris, France

24-26 February 2011

India Pavilion at Asia Pharma Expo 2011

Dhaka, Bangladesh

23-26 March 2011

India Pavilion at FerroformaBricoforma 2011

Bilbao, Spain

25-30 March 2011

India Pavilion at EMAQH 2011

Buenos Aires, Argentina

What is a Triptyque De Passage? For what purposes is it used?

Interested participants may contact any Regional Office or B Sarkar Addl Executive Director & Secretary EEPC India Vanijya Bhavan (1st Floor), International Trade Facilitation Centre 1/1 Wood Street, Kolkata -700016, India Tel: +91 33 22890651-53, Fax: +91 33 22890654, email: eepc@eepcindia.org

IndianEngineeringExports advertising rates Advertisement Tariff Colour

B&W

Back Cover

Rs20,000 (US$ 625)

Inside Back Cover

Rs16,000 (US$ 525)

Inside Front Cover

Rs18,000 (US$ 575)

Centrefold

Rs30,000 (US$ 900)

Full Page

Rs13,000 (US$ 400)

Rs10,000

Half Page

Rs8,000

Rs6,000

Strip

Rs5,000

Rs4,000

Logo on the Flyleaf

Rs10,000 (Bi-colour)

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AUGUST 2010

ATA Carnet is an international customs document that permits duty-free temporary import of goods during its validity period. ‘ATA’ is an acronym of the French and English words ‘Admission Temporaire/Temporary Admission.’ ATA carnets cover: commercial samples; professional equipment; goods for presentation or use at trade fairs, shows, exhibitions and the like. Government of India has acceded to the ‘Customs Convention on ATA Carnet for Temporary Importation of Goods.’ The convention provides for temporary admission of goods free of import duty and free of import prohibitions or restrictions.

Triptyque/Carnet De Passage is a travel document issued by approved automobile associations abroad for the purpose of temporary importation of private motor vehicles into India by the tourist free of duty. Such vehicles may be imported duty-free into India subject to following conditions: • The importer must be a member of an automobile club or association belonging to the Federation of Alliance Internationale De Tourisme. • While importing the vehicle he must produce the triptyque or carnets de passages issued by the Alliance Internationale De Tourisme in the form approved and issued to him by a club or association guaranteed by the Federation of Indian Automobile Association. • The period of retention of the vehicle in India does not exceed six months. The period may extend the period of six months by a further period of six months. Notification No.296/76 Customs, as amended from time to time, has been specifically issued for this purpose. The rates are proposed for single

Print Area

insertion. Discounts may be given

Back Cover

26.6 cm x 20.7 cm

for more than one insertion.

Inside Back Cover

26.6 cm x 20.7 cm

The proposed tariff is:

Inside Front Cover

26.6 cm x 20.7 cm

Centrefold

26.9 cm x 41.4 cm

Full Page

26.6 cm x 20.7 cm

Half Page

12.9 cm x 18.4 cm

Strip

6.4 cm x 18.4 cm

For 3 months

3%

For 6 months

6%

For 12 months

10%

Members of EEPC India will get a further discount of 10% of the total cost.

INDIAN ENGINEERING EXPORTS


EEPC India Office bearers of EEPC India

Offices in India

Sub-regional offices

CHAIRMAN Aman Chadha Phone: Off 91-22-40325600/40325678 (D) Res: 91-22-23516865 Fax: 91-22-23854428/40325646 e-mail: chairman@eepcindia.org aman@nikkobearings.com

R. Maitra Executive Director EEPC INDIA Vandhna (4th Floor), 11 Tolstoy Marg New Delhi 110 001 Tel: 91-11-23353353, 23711124/25 Fax: 91-11-23310920 e-mail: eepcto@eepc.gov.in

Bangalore EEPC INDIA Vinayaka Complex (2nd Floor) 44/45, Residency Road Cross Bangalore 560 025 Tel: 91-80-25581396/25588669 Fax: 91-80-25586914 e-mail: eepcsrob@vsnl.net

HEAD OFFICE Bhaskar Sarkar Addl. Executive Director & Secretary EEPC INDIA Vanijya Bhavan (1st Floor) International Trade Facilitation Centre 1/1 Wood Street, Kolkata 700 016 Tel: 91-33-22890651/52/53 Fax: 91-33-22890654 e-mail: eepc@eepcindia.org

Hyderabad EEPC INDIA 'Soham Mansion' (1st Floor) No. 5-4-187/3 & 4/4, M. G. Road Secunderabad 500 003 Tel: 91-40-27536704 Telefax: 91-40-27536705 e-mail: eepcindiahyd@gmail.com

VICE CHAIRMEN Mahesh K. Desai Phone: Off 91-40-27615131/27617098 Res: 91-40-27765793 Fax: 91-40-27614376 e-mail: hyd1_meera@sancharnet.in Anupam Shah Phone: Off 91-33-22872511/22874447 Fax: Off 91-33-22875104/22870780 e-mail: nipha@niphaindia.com anupam@niphaindia.com REGIONAL CHAIRMEN Eastern Region B. N. Agarwal Phone: Off 91-33-24858750/51/52/53 Res: 91-33-24615916/5596 Fax: 91-33-24858749 e-mail: rba@rbagarwalla.com bna@rbagarwalla.com Northern Region S. C. Ralhan Phone: Off 91-161-2673805/806/2670219 Res: 91-161-2670129/2672542 Fax: 91-161-2671049/2676817 e-mail: sritools@jla.vsnl.net.in Southern Region Ramesh Kumar Mutha Phone: Off 91-44-25323885/5057/43444620 (D) Res: 91-44-42140999/4456 Fax: 91-44-26430087/89 e-mail: mutha@mmexports.com Western Region Nayan N. Shah Phone: Off 91-22-65702939/26763555 Res: 91-22-26207506 Fax: 91-22-28730291 e-mail: info@kewelectricals.com

TERRITORIAL DIVISION EEPC INDIA Vandhna (4th Floor) 11 Tolstoy Marg, New Delhi 110 001 Tel: 91-11-23353353, 23711124/25 Fax: 91-11-23310920 e-mail: eepcto@eepc.gov.in REGIONAL OFFICES Chennai EEPC INDIA Greams Dugar (3rd Floor) 149 Greams Road, Chennai 600 006 Tel: 91-44-28295501, 28295502 Fax: 91-44-28290495 e-mail: eepcchennai@airtelmail.in Kolkata EEPC INDIA Vanijya Bhavan (2nd Floor) International Trade Facilitation Centre 1/1 Wood Street, Kolkata 700 016 Tel: 91-33-22890673/74 Fax: 91-33-22890687 e-mail: eepcrokol@vsnl.net

Jalandhar EEPC INDIA Plot Comm. 1, Focal Point Jalandhar 144004 Tel: 91-181-2602264 Fax: 91-181-2601124 e-mail: enggcorp_jld@dataone.in FOREIGN OFFICES Singapore EEPC INDIA No. 3, Shenton Way, #07-02 Shenton House Singapore 068805 Tel: 65-62279282/83 Fax: 65-62279284 e-mail: enexprco@singnet.com.sg USA EEPC INDIA 411 Business Center Drive, Suite 103 Mount Prospect, Illinois 60070, USA Tel: 1-847-297-8500 (2 lines) Fax: 1-847-297-8502 e-mail: eepcilusa2@yahoo.com eepcilusa@gmail.com

Mumbai EEPC INDIA Centre 1, 12th Floor, World Trade Centre Cuffe Parade, Mumbai 400 005 Tel: 91-22-42125555 Fax: 91-22-42125556/22180119 e-mail: eepcmum@mtnl.net.in eepcmum@vsnl.com New Delhi EEPC INDIA 4A Vandhna Building (4th Floor) 11 Tolstoy Marg New Delhi 110 001 Tel: 91-11-23314171/74 Fax: 91-11-23317795 e-mail: info@eepcrodel.org/mail@eepcrodel.org

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AUGUST 2010

INDIAN ENGINEERING EXPORTS


EEPC India Helping Indian engineering firms do business around the world. Helping the world access the best of Indian engineering.

With over 13,000 members, EEPC India is the largest export and trade promotion body in India. EEPC India operates 9 offices in India and 2 overseas, in Chicago and Singapore.

www.eepcindia.org


Date of publication: 1 September 2010, R.N.I. No: WBENG/2008/24569

Postal Registration No. : KOL RMS/ 397 / 2009-2011 Licensed to Post without Prepayment Licence No. MM&PO/SSRM-KOL RMS/RNP-397/LPWP-039/2009-2011


Indian Engineering in Colombia