Stronger from the crisis: ThyssenKrupp in fiscal 2009/2010

Upward trend continuing / earnings before taxes higher than forecast / order intake and sales up from prior year / earnings per share to €1.77 / Outlook: Further sales and earnings growth in 2010/2011

In 2010 the global economy recovered from the deep recession faster than expected a year ago. As a result, demand for the ThyssenKrupp Group's products and services also improved distinctly. Order intake, sales and in particular earnings showed a clear upward trend in 2009/2010. Executive Board Chairman Dr. Ekkehard Schulz: "The massive improvement in earnings also shows that the operating and structural measures introduced in the wake of the economic and financial crisis were successful. The Group has emerged from the crisis stronger."

The key data of fiscal 2009/2010

• Order intake climbed 15% to €41,250 million (prior year: €35,970 million)
• Sales improved by 5% to €42,621 million (prior year: €40,563 million)
• EBITDA increased by €3.0 billion to €3,224 million (prior year: €192 million)
• EBIT came to €1,787 million (prior year: €(1,663) million)
• Adjusted EBIT increased to €1,682 million (prior year: €(375) million)
• EBT rose by €3.5 billion to €1,135 million (prior year: €(2,364) million)
• Adjusted EBT increased by €2.1 billion to €1,030 million (prior year: €(1,076) million)
• Earnings per share were €5.78 higher at €1.77 (prior year €(4.01))
• Net financial debt was up by €1.7 billion at €3,780 million (prior year: €2,059 million)
• Dividend per share: €0.45, proposal to the General Stockholders' Meeting (prior year: €0.30)
• Employees: 177,346, with 71,072 in Germany, 106,274 outside Germany (prior year: 187,495 in total, Germany: 81,229, outside Germany: 106,266)

In 2009/2010 ThyssenKrupp achieved earnings before taxes of €1,135 million. Year-on-year, EBT improved by €3,499 million. The earnings figures for the reporting year include positive nonrecurring items of €105 million: Income from the disposal of the Industrial Services units and Hellenic Shipyards was partly offset by expense in the Components Technology business area. The Group's adjusted EBT was €1,030 million, up €2,106 million from the prior-year figure of €(1,076) million. Adjusted EBT was therefore also higher than the raised August forecast.

All business areas contributed to the Group's higher EBT - with the exception of Steel Americas, where the startup of the new plants in Brazil and the USA had a negative impact. In all business areas the restructuring and cost-reduction programs contributed significantly to the earnings improvements.

Sales and in particular order intake increased appreciably. The Group's sales improved by 5% to €42,621 million. Order intake climbed year-on-year by 15% to €41,250 million. Sales of flat-rolled carbon steel, stainless steel and automotive and industrial components showed in part vigorous growth. Business in industrial plant, e.g. for the fertilizer and plastics sectors, was very stable. The same was true of elevators, escalators and passenger boarding bridges.

At €1.77, earnings per share increased €5.78 from the 2008/2009 fiscal year (€(4.01)). In view of this significant earnings improvement, the Supervisory Board and Executive Board will propose to the General Stockholders' Meeting on January 21, 2011 the payment of an increased dividend of €0.45 per share.

On September 30, 2010 net financial debt at €3,780 million was €1,721 million higher than a year earlier, due mainly to investment in operating assets and property, plant and equipment - in particular in connection with the major projects in Brazil and the USA.

From fiscal 2010/2011 ThyssenKrupp is switching its key earnings performance indicator from EBT to EBIT, which measures operating performance more concretely. In this connection, also beginning from the 2010/2011 fiscal year, ThyssenKrupp has narrowed its definition of EBIT: In the future EBIT will no longer include components of other financial income/expense which are non-operational in nature (e.g. income from the capitalization of interest costs during construction). EBT will not be affected by this measure.

Outlook

Looking forwards to the 2010/2011 fiscal year, ThyssenKrupp remains cautiously optimistic about developments in its core markets and key customer sectors. The focus remains on optimizing the structure of the Company, including further targeted disposals of activities from the Group portfolio. The Group will also concentrate on the efficient ramp-up of its new steelmaking and processing plants and the associated entry to the US market.

For fiscal 2010/2011 we expect a further 10% to 15% increase in the Group's sales (2009/2010: €42.6 billion). Earnings are expected to grow faster than sales. This will follow from further operating improvements and the recovery of our sales markets, which will more than offset the negative earnings impact from the Steel Americas business area. Adjusted earnings before interest and taxes (EBIT adjusted for nonrecurring items) are forecast to be around €2 billion (2009/2010: €1.2 billion). The comparative 2009/2010 figure - like the outlook for 2010/2011 - is based on the modified definition of EBIT.

Executive Board Chairman Dr. Ekkehard Schulz: "ThyssenKrupp is on track to sustainable value creation: The new structure and the efficiency measures are taking effect, the Americas projects have successfully started operation. The Group is returning to its long-term growth path."

At the close of the General Stockholders' Meeting on January 21, 2011 Dr. Heinrich Hiesinger, who joined the Executive Board of ThyssenKrupp AG on October 1, 2010, will take over the position of Executive Board Chairman. At the same time Dr. Jürgen Claassen, previously Executive Vice President of the Company, will be joining the Executive Board.

ThyssenKrupp is an integrated materials and technology group with currently almost 177,000 employees in more than 80 countries developing ideas and innovations to offer solutions for sustainable progress. In the 2009/2010 fiscal year they generated sales of more than €42 billion. Eight business areas focus the Group's activities and know-how in the strategic competency areas of Materials and Technologies. In addition to manufacturing materials and plants, the Group also provides complete system solutions and innovative services. We are continuously optimizing our portfolio to sustainably increase the earning power and the value of the Company.

Rio Tinto gives green light to further US$1.2 billion iron ore investment in the next step of Australia’s largest mining project

Rio Tinto has approved a further US$1.2 billion investment in its drive to lift annual iron ore production capacity in Western Australia’s Pilbara region to 283 million tonnes per annum (Mt/a). The capital will be used for significant expansions at the Brockman 4 and Western Turner Syncline mines.

This latest development is part of Rio Tinto’s broader plan to expand capacity by more than 50 per cent over the next five years to 333 Mt/a, which is the largest mining project in Australian history. Rio Tinto has announced new investment of US$7.2 billion (Rio Tinto share US$5.1 billion) in the Pilbara since July this year.

Rio Tinto chief executive Iron Ore and Australia, Sam Walsh said the expanded mines would provide the bulk of the additional throughput for the recently announced US$3.1 billion rail and port works around Cape Lambert.

“These decisions highlight our strategy of bringing on new capacity in line with infrastructure developments, using 100 per cent Rio Tinto-owned brownfield developments to dovetail with existing infrastructure where possible,” he said.

“It also highlights the wealth of large, long-life, well situated and wholly owned deposits we can bring forward in conjunction with our expansions of port and rail capacity.” 

The Brockman 4 mine (about 60 kilometres west of Tom Price) will be expanded from an annual capacity of 22 million tonnes (Mt/a) to 40 Mt/a. The mine is currently ramping to reach its first phase capacity in 1H 2011. Only opened in September, within three years it will become Rio Tinto’s second largest iron ore mine.

The Western Turner Syncline mine (about 30 kilometres west of Tom Price) will be expanded from its current 6 Mt/a capacity to 15 Mt/a.

Both mines are wholly owned by Rio Tinto, and the ore from each deposit will contribute to Rio Tinto’s Pilbara Blend lump and fines products.

The two projects represent the first two of three mine developments to expand mine capacity to 283 Mt/a by the fourth quarter of 2013. The third mine earmarked for expansion as part of this programme, Nammuldi (50 kilometres north west of Tom Price) is currently under study, with an investment decision expected in 2011.

Rio Tinto’s integrated operations will be progressively upgraded through this sequence:

• 220 Mt/a – current operating capacity
• 225 Mt/a by end of Q1 2011 - Dampier port systems efficiencies (in implementation)
• 230 Mt/a by end of Q1 2012 - Dampier port incremental (in implementation)
• 283 Mt/a by end of H2 2013 – Cape Lambert B 1st 53 Mt/a increment (approved to implement)
• 333 Mt/a by end of H2 2015 – Cape Lambert B 2nd 50 Mt/a increment  (feasibility study)

The Brockman 4 Phase 2 project includes an expansion of the village, additional mine fleet and construction of a primary crusher and a 4-kilometre overland conveyor to increase the Brockman 4 operation from its scheduled 22 Mt/a to 40 Mt/a capacity in the first half of 2013.

The Western Turner Syncline expansion incorporates the construction of a primary crusher and a 20-kilometre overland conveyor to deliver ore to the Tom Price primary stockpiles.  Existing Tom Price infrastructure will be utilised, including the high grade and low grade processing plants, stockyards, train load-out and on-site facilities. The first phase will provide 15 Mt/a capacity from the second half of 2013.

Both developments will require a number of Government and regulatory approvals. 


About Rio Tinto
 
Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London and NYSE listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange.

Rio Tinto's business is finding, mining, and processing mineral resources. Major products are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa.

World Bank to support NHAI to better manage its road development program 

               

WASHINGTON, November 30, 2010: The World Bank today approved a $45 million technical assistance loan to India which will finance actions to strengthen the institutional capacity of the National Highways Authority of India (NHAI) to efficiently  manage and operate its growing program.

Forty percent of the total road traffic in India plies on the National Highway (NH) network and this share is likely to increase with vehicle growth touching 10% per annum in recent years. However, about 30 % of the total NH network is still single-laned, 53%  double-laned  and only 17% is four /six /eight-laned.  Recognizing that the condition of the NH network could pose a key constraint to sustaining high levels of growth, the Government of India had launched the National Highway Development Project (NHDP) in year 2000, which is being implemented by the NHAI. It has been estimated that the road sector in India will require investments in the range of $75-90 billion over the next five years.

“The Government of India is committed to removing any constraints in road infrastructure that may hamper economic growth and has entrusted the responsibility of improving the capacity of India’s core highways to NHAI.  This technical assistance loan from the World Bank will help NHAI adopt global practices that would enhance its operational efficiency as it implements this critical infrastructure program,” said Venu Rajamony, Joint Secretary, Department of Economic Affairs.

This project will also help NHAI implement the recommendations of an Inter-Ministerial Committee set up in 2008 on the restructuring of NHAI.

“Recognizing the need for improving road infrastructure in the country, the government plans to add 20 km of new or improved roads each day as against the recent rate of 3 km per day,” said Roberto Zagha, Country Director for India. “The World Bank is happy to work with NHAI as it ramps up the pace and quality of implementation of this national program,” he added.

NHAI is faced with the challenge of enhancing its program standards – on governance, accountability, asset management and safety -- on an ongoing basis, as well as preparing to deliver the manifold increase in output as recently desired by the government.

The project will support training to enable NHAI to improve its project management, research and capacity building, asset management and resources planning, Public-Private Partnerships, socio-economic and environment impact evaluation, safety, HIV/AIDS prevention, and governance through adopting appropriate approaches and practices.

 
“As more roads are completed at a rapid rate, we envision the changing role of the NHAI from merely building infrastructure to better managing these vital assets,” says Rajesh Rohatgi, Project Team Leader. “We are looking forward to supporting NHAI in managing their current implementation constraints as well as preparing for the future and come up with solutions for improved asset management and resource planning.”
 
The loan, from the International Bank for Reconstruction and Development (IBRD), has a 5-year grace period, and a maturity of 18.5 years.

Shifting focus from Dollar to China

The ghost of global meltdown seems to be knocking at the doors once again as the European economic crisis started getting graver with some of the top economies of the European Union including Ireland, Portugal and Greece, alarmingly reeling under the debt crisis, and on the other, China continues threatening global economies of its rate hike and currency devaluation to safeguard its growth interests, which may prove as a disaster for the western countries. 

The global recession witnessed during 2008-09 is regarded as the worst global economic crisis since the World War-II. Employment opportunities declined, manufacturing activity stagnated, stock markets bottomed out and the world witnessed its one of the worst period in the modern economic history. 

In the post World War-II era, the world economies had recognized the superior powers of the United States with huge resources and large scale demand potential making it the super power, which started dominating the global commercial as well as political relations. 

The west started proliferating its ‘Capitalist’ school of thought and expanded commercial relations across the world on that basis. The world, in turn, accepted the US Dollar as an undisputed universally acceptable currency, making it the official reserve instrument for central banks of most of the emerging economies. 

But in the recent past, considering the sub-prime crisis and the strong repercussions of the event that pushed the global economy into the darkness of the recession, the Dollar’s acceptance as a universal reserve currency has come under threat. 

Considering the ailing weakness in the US economy and the Federal Reserve still struggling to bring back the economy on track by offering quantitative easing measures, one after another, has added to the worries of the ‘rest-of-the-world’ about their holding of the Dollar and its worth in the current scenario. 

With recent visit of the US President Barack Obama in the Asian region says much more in action than what has been said on the dais. A president of the most powerful economy in the world makes a visit to the emerging countries like India, Indonesia and South Korea is a sign to be read between the lines. 

Quite significantly, President Obama specifically raised concerns about China’s currency devaluation plans and boosting its manufacturing-led export growth. This indicates that the super-power is plugged into a situation, for which China holds the switch! 

Post World War-II, Russia, formerly, the United Soviet Socialist Republic (USSR) diluted its policies to be more liberal, while another Asian giant, India adopted a mix of capitalism, i.e. market economy and a state-backed model of growth, i.e. socialist pattern. But China maintained its staunch communist school of thought and adopted growth model based on that. 

Now, over six decades down the line, the West, which had pushed in all the resources to fuel market-led economic and industrial growth and followed a pure capitalist ideology, seems almost collapsed and a complete failure in bringing the happiness. 

On the other hand China and some-what socialist India and Russia had continued growing on a rather conservative model over these sixty years and successfully sailed through the troubled times of the global meltdown of 2008. 

The focus seemed shifting from currency strength, which dollar represented, to the country strength, which now China is seen showing by threatening the global community from its rate hike moves and currency devaluation plans. 

Over last few trading sessions on the commodity and equity bourses, the markets across the world are seeing red due to China fears. 

An interest rate hike in South Korea earlier Tuesday had caused sharp sell off in metal sector. The participants are worried that China may soon follow suit. If China, a top consumer of copper and aluminium, adopts a rate hike measure to cap its galloping inflation, it would hurt the industrial consumption, thereby leading to reduced imports by the country. 

On these worries, base metals had slumped more than 5% in past trading sessions, while on the equities front, the Asian equities are among the worst hit in past few trading sessions. 

Shanghai markets tumbled over 10% in past couple of trades. The sentiment is weak in the wake of the speculation that the government would hike interest rates for the second time in two months to tame the rising inflationary pressure. China’s annual inflation rate jumped to a 4.4% rate in October, 2010 one of the highest in past two years.

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Another food crisis on the horizon

Swinging prices of crops this season, mostly on an upward direction, makes it extremely difficult for poor people across the world to counter everyday life. 

Skyrocketing prices of food have sparked riots in numerous countries recently. Millions are reeling from sticker shock and governments are scrambling to staunch a fast-moving crisis before it spins out of control. 

Protests have turned violent in most regions were riots broke out. Rioters tore through three cities in the West African nation of Burkina Faso in September, burning government buildings and looting stores. 

Former US president George Bush ironically attributed food shortages to increased consumption by rising population in India and China. 

Of course that view is true to certain extent as billions of people are buying ever-greater quantities of food especially in booming China and India, where many have stopped growing their own food and now have the cash to buy a lot more of it. 

Increasing meat consumption, for example, has helped drive up demand for grain, and with it the price. 

Oil price hike also adds up to food price increase as it will push up cost of trucking food from farms to local markets and shipping it abroad. 

Then there is climate change. Harvests have been seriously disrupted by freak weather, including prolonged droughts in Australia and southern Africa, floods in West Africa, and this past winter's deep frost in China and record-breaking warmth in northern Europe. 

Some analysts attributed high commodity prices to global rush towards investing in commodities as currencies get devalued by countries eager to increase exports in a zero sum game. 

Wheat Prices were the first to rise after Russia stopped exports leading to the sharpest gain in the last 2 years. 

Corn prices have increased with increased demand from ethanol, Rice and Soybean prices were bound to rise in empathy with other grain prices. 

Rice futures is likely to extend their rallies to next year on increased demand and crop losses in the biggest producers may curb global supply. 

Exports from major producers India, China, Thailand, Vietnam, Pakistan and the U.S, which account for about 80 percent of global trade, will gain 8.4 percent from a year earlier to 24.7 million metric tons this year, draining stockpiles. 

Hot weather was forecast to curb yields in the U.S. as rice crops in Thailand and Vietnam, the two largest exporters, and the Philippines, the biggest buyer, were hurt by excessive rains and flooding. 

Though, crop prices had a bit of pull back in early November due to Chinese demand concerns, the cold winter expected from La Nina has fuelled speculation that even southern hemisphere crops may struggle, and once again send prices higher. 

Some analysts blamed globalization of agriculture for rising food prices. They said the worst affected will be the most vulnerable poor sections which live on the brink of starvation. Food prices rise in India has already led to widespread distress last year and this adverse scenario likely to extend in coming years as well.

Wheat prices have climbed nearly 40 percent in the last few months. Russia’s wheat production is expected to decline by almost 30% in 2010 leading to a sharp fall in exports. 

The increase in wheat prices has been sharper than in 2008 due to fears of shortage of global supply. 

Meanwhile, China’s worst flooding since 1998 threatens to cut the rice production which has led to increase in global rice prices already. China produces 1/3rd of the world’s rice or 137 million tons which might be reduced by 10% due to these floods. 

Rice prices are expected to rise further due to these floods which have killed almost 1000 people Prices of pork which is heavily consumed in China have also risen steeply leading to fears of increased food inflation. 

One thing is very clear, the world not only needs to produce more foods but also to adopt a strategy so that it will reach all corners of the world.

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Winging with your own number

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Many million subscribers unhappy with their service providers will be grateful for the mobile number portability scheme.

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Nothing emboldens a seller more than the knowledge that the customer cannot walk away from the deal without losing a significant amount of money; nothing chastens the seller more than a law that ensures the customer can do so. The new dispensation on mobile number portability that came into effect this week will now enable disgruntled mobile users to switch service providers and yet keep their 10-digit telephone number. The cost, a mere Rs 19, is unlikely to be a deterrent to switching, and it is therefore not surprising that all mobile operators are readying a sheaf of services and friendlier tariffs to hold on to their subscribers, or better still, to persuade those with the competition to cross the floor. The lowering of tariffs is one of the intended consequences of this rule and the regulator, the Telecom Regulatory Authority of India must be commended for persevering with this customer-friendly initiative. That is what over 50 countries already offer to their telephone subscribers and there is no good reason why India should not give its consumers the choice.

Of course, there were several objections especially from service providers on the proposal and its modalities, which is why the idea first mooted in 2005 has taken so many years to take effect. Some were rooted in the fear that enhanced competition creates, even though for the record the objections seemed more rational. A considerable investment had to be made in technology for the sake of the few subscribers who do not want to inform their contacts about their changed number, said one telephone company; the cost would have to be borne by all others. That point has to be conceded. The availability of choice comes at a price for a consumer. But at the end of the day the consumer is more likely to be better off dealing with competing sellers rather than a monopoly because the bargaining chips are differently stacked. It is also true that the availability of choice in itself will not deliver the full advantage to a consumer if there are hurdles to his switching from one seller to another.

The mobile number portability scheme is an attempt to remove one such barrier, which many million subscribers unhappy with their service providers will be grateful for. To the extent the scheme does permit switches only within the same telecom circle and not let subscribers carry the number, say, from Chennai to Mumbai, it limits their freedom. And further, once they port to another operator, and find things no better, they have to wait three months before they get another chance. Forget these caveats, subscribers will appreciate the fact that they can keep their identity even as they get their wings.

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Surviving uncertain times

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It is now evident that the world economy is in for another spate of major problems, with recession and stagnation likely to affect the largest economies and altering prospects for growth elsewhere. This edition of Macroscan examines recent patterns of the Indian economy's external engagement, in order to gauge how well equipped it is to face this uncertain future.

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The challenge of bridging the divide

There's really no question about it: the world economy is heading for a period of great economic uncertainty, in which instability, trade and currency conflicts and possibilities of economic stagnation all loom large. This reflects the absence of a global economic leader willing and able to fulfill the roles identified by Charles Kindleberger: discounting in crisis; countercyclical lending to countries affected by private investors' decisions; and providing a market for net exports of the rest of the world, especially those countries requiring it to repay debt.

For obvious reasons, the US cannot currently do these, and there is no evident alternative. That is why co-ordination is so critical right now for international capitalism, and why its absence will definitely be felt. Governments of both developed and developing countries seem to be caught between the (often self-imposed) rock of fiscal consolidation created by the hysteria of bond market vigilantes and the financial media, and the hard place created by the unwillingness to give up what is clearly an outdated growth model. As a result, we are faced with the worst of all economic outcomes in terms of socially fraught stagnation in the North and ecologically destructive and fragile expansion in the South, with workers everywhere getting even worse off than before.

Major imbalances

There are three major imbalances that continue to characterise the global economy: the imbalance between finance and the real economy; the macroeconomic imbalances between major economies; and the ecological imbalance created by the pattern of economic growth. While these are obviously unsustainable, the very process of their correction will necessarily have adverse effects on current growth trajectories.

As it happens, the US current account deficit is already under correction: the current account deficit in 2009 was just above half its 2008 level, and the data for this year suggest that it will stay at around that level. For the rest of the world, it does not really matter whether the reduction occurs through currency movements or trade protectionism or domestic economic contraction: the point is that some other engine of growth has to be found.

Curiously, the governments of the major economies in the global system, including G20, do not seem to have grasped this. The rather obvious point that all countries cannot use net export growth as the route to expansion does not seem to have been understood, so all governments think they can export their way out of trouble. This will have inevitable implications for trade and currency wars, and the likelihood of global economic stagnation.

Skewed growth

So how well is the Indian economy likely to cope in the near future, and how will the population as a whole fare in these uncertain times? There has been much celebration in the financial media in India about how well we have weathered the Great Recession, and certainly the output indicators (Chart 1) are impressive in the overall global context. Despite poor agricultural performance, rates of growth of aggregate GDP have remained high because of continued high growth in services and significantly accelerated growth of industry (dominantly manufacturing).

However, the recent pattern of growth has in general been so heavily skewed towards certain services that it has created an apparently unbalanced economy (Chart 2). Agriculture and other primary activities account for less than 15 per cent of GDP, even though they continue to employ well over half the work force in what is obviously mostly low productivity activity. Manufacturing has remained stable, and relatively small, in output and even smaller in employment. However, the newer services that now dominate the GDP do not employ too many people either, so that most other workers are engaged in low remuneration services. Meanwhile, the FIRE sector (finance, insurance, real estate, and business services) has been growing rapidly and now accounts for an even higher share of GDP than manufacturing – a sure sign of a bubble economy.

So this means that we are back to the same unsustainable pattern of growth that generated the images of “India shining”: booms in retail credit sparked by financial deregulation and enabled by capital inflows. These have been combined, especially in the wake of the global crisis, with fiscal concessions to spur consumption among the richest sections of the population. This has generated a substantial rise in profit shares in the economy and the proliferation of financial activities, and combined with rising asset values to enable a continuation of the credit-financed consumption splurge among the rich and the middle classes along with debt-financed housing investment.

The problem is that this is associated with a balance of payments trajectory that is fundamentally unsustainable. As Chart 3 shows, it is only the invisibles account (led by remittances from India workers abroad and software and related exports) that has kept the balance of payments from appearing to be even more stark. The trade account shows ever growing deficits, which are increasingly driven by non-oil imports. Meanwhile, the large inflows of capital are really being stored up in the form of foreign exchange reserves, for fear of causing excessive exchange rate appreciation.

Hot money inflows

In fact, after a brief period of reduction, India's place as a currently favoured destination for internationally mobile capital was reinforced in the past year. Chart 4 shows how different elements of the capital account have behaved in recent years. The most rapid post-crisis recovery has been in portfolio capital, which fell during the crisis year but surged back to high levels the subsequent year. In fact, the most recent data (not covered in this chart) indicates a troublesome surge in such hot money inflows, of more than $70 billion in just a few months – troublesome because it can lead to an unwanted currency appreciation and because it can just as easily flow out again.

This is a problem plaguing several emerging economies, and underlines the need for capital controls to prevent unwanted inflows of speculative capital. So much so that even the IMF has started advocating such controls for developing countries that are being swamped by the “carry trade” based on interest rate differentials across economies.

Unfortunately our own government seems much less conscious of the dangers such inflows pose, especially for an economy that is clearly in the midst of another bubble-driven expansion. Instead, Ministers are talking about the economy being able to absorb at least another $100 billion of capital inflows – unmindful of the reality that the economy has not even absorbed the smaller amounts that are currently pouring in, and instead is simply accumulating reserves. In any case, such absorption has to be sustainable, which is why much more attention is required to improving the trade account. This is going to be much more difficult in the current global economy, but clearly the need is for both diversification of trade and more attention to sustainable expansion of the domestic market.

Diversification

The good news is that on the external trade front there does seem to have been a significant process of diversification in the past decade, as Charts 5 and 6 indicate. China is our largest trading partner now, though that dominantly consists of India exporting raw materials and intermediates and importing finished goods from China. The Middle East has also emerged as a major market, and other areas are playing increasing roles.

However, without sustained expansion of the domestic market, the condition of the bulk of the Indian population will not improve. This really requires increasing the disposable incomes of wage earners and the self-employed, not just a credit-based expansion of demand that is bound to end in tears. But for this, there has to be more official focus on generating both employment and better remuneration. This is actually quite doable, since it can be led by increased public provision of essential goods and services (all of which are employment generating and have high multiplier effects. But for that, we need genuine political will.

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