The Indian Economy - Page 31

Even for the most jaded cynic, the image of serpentine queues of smiling men and women waiting patiently in the harsh heat of Indian summer to cast their votes, cannot fail to inspire. Also impressive is that India regularly carries out this logistical miracle almost flawlessly, given the scale -some 714 million voters this time, of whom 420 million voted, making the elections the world's largest expression of democracy. Transfers of power in India are peaceful and orderly, and when change occurs it does not lead to the kind of anxiety that greets change elsewhere in the developing world, in particular, its own volatile neighborhood. Indian winners are gracious and don't go about jailing their opponents. Parliamentary debates are robust; the press is free; and the judiciary is often impartial. But all is not right with the world. The democratic roots are deep, but the Indian system has fundamental flaws and weaknesses. Its parliament has too many politicians with criminal charges pending against them. Its judges are overwhelmed by the load of pending cases. Its press often fails to hold politicians to account. And its bureaucrats are not under much pressure to perform. The result is staggering underperformance: India has the world's largest number of illiterate people, tens of millions of people live on less than a dollar a day, easily preventable diseases are widely prevalent and discrimination remains rampant. Unless India requires its pillars of governance to do better, it will continue to perform well below its potential. Take the Parliament. The bounce the stock market experienced in India after election results were announced was because the markets had feared instability. Most analysts had expected an indecisive verdict, which is why they have called the Congress's victory as resounding. But a closer look at the numbers shows that the support for national parties has dropped. As columnist Devangshu Datta points out in the Business Standard, the combined vote of the two national parties the Congress and the Bharatiya Janata Party actually fell to 47.4% in 2009 from 48.7% in 2004. But the votes smaller, or regional, parties have gained is divided among 369 parties this year, as against 215 in 2004. In this fragmented field, the Congress's share rose 2.1 percentage points to 28.6%, giving it 206 seats, still 66 short of majority. It gained 51 more seats this time, just as the BJP lost 22 seats (to finish at 116), its vote share falling to 18.8% from 22.2%. It is clear that the results aren't an overwhelming mandate for national parties over regional ones; moreover, the Congress has gained substantially, but it cannot declare victory yet in its efforts to regain its traditional role of being the centrist party a large majority of Indians support. The last time Indians gave a single party the majority was in 1984, when the Congress won over 400 seats out of 543, in the extraordinary election held within weeks of Prime Minister Indira Gandhi's assassination. Since then, India has held seven parliamentary elections, each returning a coalition, some of which were formed after results were announced. This political instability has led to public disillusionment. Beyond that, many Indians think politicians are corrupt, ineffective or have criminal links. Take corruption first. The assets of some mps have risen by gravity-defying rates between 400% and 900% over the past five years. Few mps gave credible explanations how their assets rose at such astonishing rates. So strong was the disenchantment with the available choices that some campaigners asked voters to use the rule 49-O of Indian election laws, which lets voters to declare that they don't want to vote for any candidate. The campaign failed; what was remarkable, however, was that it was launched in the first place.

Then think of ineffectiveness. Providing safety and security is the primary responsibility of the government. Juxtapose that with the fact that India has lost more people to terrorist violence in the past five years than any country other than Iraq, with the attacks in Mumbai in November 2008 being the most spectacular. While thousands of citizens of Mumbai held candlelight vigils, when it came to voting, the turnout in the constituency where the attacks occurred was pitifully low. voters in wealthy areas, such as South Mumbai, don't think they need to vote; they are able to operate without a government. Finally, criminal charges: Analysis by voter education groups show that some 15% of all candidates had criminal charges pending against them. After the elections, the Association for Democratic Reforms and the National Election Watch calculated that 153 of the 535 mps or nearly 28% whose affidavits were available have criminal charges filed against them. In 2004, the figure was 128 mps. Such charges include attempted murder, robbery and forgery. The BJP leads with 43 mps with criminal charges pending; the Congress has 41. Furthermore, some 98 mps 39 from the Congress, 16 from the BJP have yet to provide their tax details. Of the 300 mps with assets exceeding $211,466 the average MP's assets are about $1 million 25 have not declared their tax details. To be sure, these are only charges, and the cases against them are still pending. But why should that be so? That brings us to one of democratic India's worst-kept secrets: how the rule of law is administered. Court cases remain pending because the courts simply cannot deal with the load. In India, appeals are frequent and possible even at procedural levels, and judges face such a mounting backlog that they routinely grant postponement of trials. In 2008, the number of cases pending in all courts stood at 2.9 million. One reason the backlog mounts is the unwillingness or inability of many state governments to appoint a sufficient number of judges to their courts. Some 100 judges at high courts and over 3,000 judges at lower courts remain to be appointed, and in some states, the vacancies are close to 40% of the bench-strength. Little wonder, then, that foreign investors want international arbitration to settle commercial disputes, and many Indians call for "special courts" to try specific cases. The Indian judiciary is largely impartial, and judges have often ruled against the government, but activists say that in recent years the judiciary has deferred to the state in matters of national interest. Detention without trial is common in such cases, and the number of people held in custody while waiting for their cases to come up for hearing, runs in the tens of thousands. In a recent scandalous case, Binayak Sen, a physician and human-rights activist was kept in jail for two years without being tried until the Supreme Court ordered his conditional release on health grounds in late May. Mr. Sen operates a clinic for tribals in Chhattisgarh state, and he has been an outspoken critic of the state government over human-rights abuses committed against local tribes by state security forces or the state-supported vigilante group Salwa Judum purification hunt. An international campaign, including 22 Nobel laureates, called for Mr. Sen's release. The Supreme Court was right in releasing Mr. Sen, just as it was right in taking the Gujarat Government to task over its failure to protect the victims of anti-Muslim riots in the state in 2002. But in each case, the Supreme Court has had to intervene because lower courts have failed to uphold citizens' rights. While India's lower courts are doing too little in cases that matter, they are doing too much in other cases that should not matter as much. Judges have given orders to bureaucrats to prevent the demolition of a particular slum, or ordered municipalities to cut certain emissions by half before a certain date. Such judgments are sometimes not enforced, eroding judicial authority. Some judges with a penchant for publicity have taken up frivolous cases, such as suing artists, movie stars and other celebrities for conduct they disapprove of such as kissing in public. What can citizens do in a democracy where a sizeable proportion of mps are of questionable repute and courts cannot administer justice quickly? Ideally, they would turn to the media. Yet television channels routinely blur fact and opinion. Many viewers were aghast at the shrill, intrusive and jingoistic way tv anchors covered the November terror attacks in Mumbai. But what of the print media, with its long tradition of freedom of expression? This election showed a seamy side of Indian newspapers. According to several reports, some newspapers told candidates that if they paid the publication, they would get better coverage, and if they paid more, their rivals would get less coverage. The rot within the media runs deep. A leading newspaper refused to send reporters for a World Bank-supported program to train journalists on covering environment and sanitation issues, arguing that if the sanitation department wanted coverage, it ought to pay. Arguably, these newspapers take their cue from the concept known as private treaties, associated with the Times of India, the country's largest-selling English daily, but practiced by several other media companies. Under these agreements, a company looking for investment enters into a private treaty with the newspaper. The paper takes a stake in the company, providing advertising support and favorable editorial coverage. The newspaper hopes to make a profit when the company goes public. Not only are readers not told of such arrangements, but adverse news about those companies is sometimes underplayed, or not reported at all. That leaves India's permanent government the bureaucracy. With the press failing to live up to its watchdog role, the judiciary hampered by inefficiencies, and politicians lacking incentives to reduce barriers to doing business, procedural delays abound in India. The World Bank's"control of corruption indicator" places India at 103rd out of 201 countries in 2008, an 11-point drop compared to the previous year. While India has improved India's rank has risen to 115th from 132nd out of 157 countries between 2006 and 2008 the pace of reforms has remained slow. Out of the 181 countries the World Bank surveys to monitor the ease of doing business, India's rank dropped to the 122nd position from 120th last year. It is still far faster to close businesses, start businesses and clear administrative hurdles in other parts of the world.
Indians deserve a more vigilant media, a well-resourced judiciary, a bureaucracy with fewer discretionary powers, and a parliament filled with politicians with assets proportionate to their income and without criminal charges pending against them. But they aren't getting that, in spite of their sincere, touching faith in democracy. Some Indians, therefore, have begun to blame the country's democratic processes for its sluggish economic performance. That's preposterous. Public disenchantment with the way things are is as much because of the criminal-political nexus, the declining faith in the judiciary, the press and the bureaucracy. It is not surprising, then, to see the BJP projecting Narendra Modi, Gujarat's chief minister, as its future leader, citing his economic performance, while ignoring the fact that he is accused of complicity in the 2002 massacres. The Congress, on the other hand, will very likely turn to Rahul Gandhi, whose father, grandmother and great-grandfather have all been prime ministers of India. Many Indians don't like intolerance and feudalism, and some are looking at autocracies with admiration. But democracy is not India's weakness; it is its strength. Democracy ensures that the decisions the government makes have public approval; it also provides the intellectual space for those who disagree with particular policies, to have their say. Democratic states are strong; they aren't weak in enforcing laws. Mature, modern, democracies operate efficiently and protect their citizens, while offering opportunities to prosper.vIndians have the political freedoms; now they need economic ones. The government needs to do less, so that its people can do more. India now has the consensus it needs. There is something noble about the faith and support millions of Indians continue to pose in their politicians. It is time they earned that trust, so that India can demonstrate that democracy and development are not mutually exclusive.

But the brief talks between Indian Prime Minister Manmohan Singh and Pakistani President Asif Ali Zardari mark a further thaw in relations. Indian and Pakistan say the thaw could help give Islamabad the political and military cover it needs to widen its campaign against militant strongholds in the country's northwest. The neighbors, are already sharing intelligence on Lashkar-e-Taiba, the Pakistan-based group believed by officials in all three countries to have carried out the gun-and-grenade rampage in Mumbai, which left more than 170 people dead. Warming relations will give India the confidence to pull some of its troops from the border with Pakistan. Still, India's lingering suspicion of Pakistan's commitment to combating Islamist militants was clear when Mr. Singh opened The meeting with a blunt message. My mandate is to tell you that Pakistani territory should not be used for terrorism against India, Mr. Singh told Mr. Zardari, according to Russia's RIA-Novosti and ITAR-Tass news agencies. The two then went in to private talks. Among India's many concerns is a Pakistani court's recent release from house arrest of Hafiz Mohammed Saeed, the co-founder of Lashkar-e-Taiba.

Mr. Saeed, who has denied any complicity in the Mumbai attack, was jailed under a vague public order in mid-December. He was freed earlier this month after a court in the eastern city of Lahore found the government hadn't produced enough evidence to hold him. Indian officials have linked nearly all terrorist attacks in the country since 2005 to Pakistan-based groups once nurtured by Pakistan's military to wage an insurgency against Indian forces in Kashmir. But until the Mumbai attack, New Delhi remained steadfast to the peace process. Mr. Singh said last week that India remained committed, pledging in India's parliament to meet Pakistan's leaders more than half-way if Islamabad fully cracked down on terrorism. Messrs. Singh and Zardari will meet again on the sidelines of a Non-Aligned Movement meeting in July in Egypt, Pakistan's foreign minister told Reuters.

Satyam virtual pool better than lay-offs: C Achuthan

C Achuthan, the government nominee on the board of Satyam Computers, spent several weeks with legal advisors to estimate legal liabilities and settle issues with regulatory agencies ahead of the sale of the fraud-hit firm. The former presiding officer of the Securities Appellate Tribunal said he favoured out-of-court settlements on legal disputes. Asked whether employees could legally challenge the virtual pool policy, he felt such a move may not survive in court. I would like to sign off from the Satyam board, if given the option, he told.

PEs play white knights to BPO companies

Private equity (PE) is undoing a part of US President Barack Obama's drive against outsourcing by pushing companies to send their back-office operations to cheaper destinations, which has helped Indian outsourcing companies close a number of deals with pharma, manufacturing, retail and energy utility companies.
Since the start of the global downturn last year, a large number of private equity firms have been driving companies where they hold a significant stake to outsource systems and back-office activities that can bring down operational expenses by up to 20%, said people connected with the trend.

Fortis leads race for Wockhardt Hospitals

Fortis Healthcare, which is owned by former Ranbaxy promoters Malvinder Singh and Shivinder Singh, has emerged as the lead bidder to acquire a part of Wockhardt Hospitals. Fortis became the front-runner after the Chennai-based Apollo Hospitals Group retracted its plans to buy three of the 12 hospitals owned by Wockhardt Chairman Habil Khorakiwala and family.

Financial sector bucks slowdown, pays more tax

Banks have clearly bucked the downturn and paid more advance tax in the June 15 instalment on the back of buoyant credit growth in the economy and treasury gains. The advance tax payments made to the Income Tax Department are important as they gives an indication of the profit expectations of the corporate sector for the entire financial year.

Delhiites go for big-ticket credit card buys

Consumers in Delhi were much more liberal compared to those in other cities when it came to spending plastic money in 2008-09. During the financial year, they've spent 38 per cent more than their Mumbai counterparts on each credit card transaction, according to a study conducted by a Mumbai-based payment solutions provider.
The Venture Infotek study found that the average ticket size of a credit card transaction in Delhi was the highest among the four metros at Rs 2,870, while the same was the lowest in Mumbai at Rs 2,076. Chennai came in second at Rs 2,716, while Kolkata was the third at Rs 2,621 per swipe.

Sebi to allow exchanges to offer interest-rate futures

Markets regulator Securities and Exchange Board of India (Sebi) said it would start seeking exchanges that meet its guidelines for offering interest-rate futures. The introduction of interest-rate futures is expected to allow investors to hedge risks on borrowing costs.

RCom to overhaul pricing model; VAS at Re1 a day

The tiny sachet that once helped shampoo makers overcome a price-sensitive market would take on a new avatar that's likely to change how cellphone companies charge their subscribers.
Reliance Communications Ltd (RCom), the country's second largest mobile phone services operator, is overhauling its pricing model to offer value-added services (VAS) such as caller tunes, news alerts and Internet surfing for as low as Re1 a day, rather than for a monthly subscription.

PM's wishlist: Peace with Pak, end of terrorism

Prime Minister Manmohan Singh said that India wanted to try again to make peace with Pakistan but Islamabad should take strong and effective actions to end terrorism against his country like it has done with regard to Taliban. A day after he met Pakistan President Asif Ali Zardari in Yekaterinburg, Singh said if the Pakistani leadership shows courage, determination and statesmanship to take the high road to peace, India will meet it more than half the way.

Order of law deteriorating in West Bengal: Chidambaram

Union Home Minister P Chidambaram said the law and order situation in West Bengal is deteriorating fast because of the Maoists violence in that state's West Midnapore District. Stating that the Centre has dispatched enough paramilitary forces to the troubled areas, he lashed out at the Left Front government in the state for not acting in a timely manner.

Corporate India

Astrologers do good business in the great Indian marriage bazaar. Anxious parents place greater reliance on their recommendations than on other due diligence. If things point negatively, other viable choices will come along, sooner or later. For a foreign company, finding a potential business partner in India who ticks all boxes is infinitely more difficult. Here are a few pointers on how to ensure a happy corporate marriage. Since the opening of the economy in 1991, Indian business has adapted well to the requirements for quality in the international marketplace. It has understood the economics of scale and quickly learned modern management methods. A successful Indian business house at such a point may be in want of a foreign collaborator who can give it access to cutting edge technology and better brand value. Such a potential partner usually has a good marketing chain and the ability to work the system. The outlook and attitude of the owner and the senior management would of course need to be carefully assessed. Chambers of commerce, lawyers, bankers and other consultants also can provide insight into a party's business, outlook, attitude, experience, reputation and resources. The regulatory environment in India has changed dramatically in the past 18 years and, barring certain sectors such as insurance, retail, and civil aviation, it is not necessary for foreign investors to have resident Indian equity holders. But there may be commercial imperatives for a partnership perhaps to nullify a worthy competitor or use an existing distribution network. Experienced mid to senior executives are readily available in India who, if engaged early on, can help avoid pitfalls and costly mistakes. A joint venture contract must be explicit as to who will be in the driver's seat. Anything else is a recipe for disaster. In most cases, Indian law leaves parties to choose their terms and select the governing law and jurisdiction. Where the exit door is clearly defined and marked, there is usually less use for it. It is useful to add a clause which gives freedom to enter into other ventures in India. But what makes the relationship last? It is none of the above. It is only a real and perceived need for each other on a continued basis. Take that away and the relationship becomes wobbly. The first few years of a new venture, like those of marital life, are crucial. In most cases, the life of an Indian couple moves along a narrow, well-defined social path which includes a number of religious functions at which the extended family and close friends participate. Joint venture relationships can be similarly cemented by senior executives and frequent meetings. A sense of religiosity may pervade and there may be invocations to God on important occasions and auspicious dates and times may be carefully plotted. A foreign partner must remain sensitive to the local customs and beliefs and ensure that there is no loss of face for either party. If he is wined and dined and displayed like a trophy wife, as may happen with first time collaborators, he should enjoy the ride without any hint of condescension. An Indian partner, no matter who he is, must always be treated as an equal. It pays to remember what King Porus said to Alexander the Great when he was brought before him in defeat. In reply to the victorious Alexander's question as to how he should be treated, the Indian King replied the same way as one king would treat another.

Finance is a tool that, when it works well, is designed to help an individual or a firm move resources smoothly across time and across different states of their lives such as good health and ill health. In a putty-like manner, it should also slide into the crevices and craters that inevitably occur in every life. Finance is very unlike a physical product because of its potential for customization and its malleability. Liquidity can be provided either through savings or a loan, with or without collateral. A loan can be based on weekly repayment or a bullet repayment or even hourly repayment if need be. A loan, when combined with rainfall insurance, can provide a payment skip when rainfall fails. A remittance inflow can be swept instantaneously into a money market mutual fund.However, driven by the need to build scale rapidly, financial institutions have sought to productize finance in the form of easy-to-sell, rigid bundles: Mortgages with Equated Monthly Installments; microloans with 50-week repayment schedules; credit cards sold on the basis of automated credit scores; unit-linked life insurance policies. Unwittingly, while perhaps making the lives of financial providers easier, this whole approach has undermined the power of finance for the customer..Nowhere is this more apparent than in the provision of financial services to rural low-income households. These households lead incredibly complex economic lives juggling the many balls of volatile incomes, health uncertainties, rainfall failures and old favors to be returned to neighbours as they struggle to feed their families daily and keep their children in school. There is more than enough evidence that even crudely designed formal financial products, when made available to these households, have on average had a positive impact. But when you start to look at what has happened at the edges or what has been left undone, an entirely different picture starts to form. In our work, we like to think of finance as playing the role of noise-cancelling headphones which listen and respond precisely to the noises in the environment of the listener and cancel them out instantaneously, leaving only smooth and high quality music. Similarly, in our view, it is possible to give households a smooth and growing net income stream and cancel out the noisy shocks in their daily lives using financial tools. For this to happen, we need to rethink the design of financial products from a customer's perspective and bring the banker back into banking, moving away from the faceless telemarketer and the itinerant salesman. How can rural finance organizations employing high school graduates at the front lines pull this off? One tool being developed by IFMR Trust for front-line finance workers analyzes household typologies based on risk profiles high dependence on wage income, high volatility of cash flows due to rainfall risk and automated algorithms that match these profiles with financial portfolios combinations of savings, investments, loans and insurance products. It also offers tools to help low-income households actually see what impact these products could have on the noise in their lives. A basic example: A wage laborer with daily cash flows is vulnerable to income interruption because of poor health or an accident where there is a double whammy of income loss and out-of-pocket expense. This can lead to severe consumption cutbacks eating less food, pulling children out of school etc. Adding insurance calibrated to the right amount and for the relevant risks lets wage earners smooth consumption even when these adverse events happen. This kind of approach we believe is the future of financial services design and delivery to low-income households. Financial providers can then be held accountable for increasing the wealth of customers by absorbing the complexity of their lives into better-designed products and tailored financial strategies. It won't just be about accounts opened or loans disbursed anymore. Therein lies the true power of finance.

The reports of the death of globalization have been greatly exaggerated, if investing trends in venture capital qualify as a compass for the future. According to a survey released June 10 by the U.S.-based National Venture Capital Association,43% of those surveyed said they would invest more in India. Perhaps reflecting how the rest of the world views Asia, the survey has interesting choice architecture: India has been given a separate standing. It could have been the other way round, but isn't. Putting aside compelling arguments derived from history and culture, the distinction also reflects the different economic growth models adopted by India on one side. India's development has been more organic, with entrepreneurs usually growing their businesses despite the government rather than because of it. The founder-CEO of a leading India-based power equipment manufacturer once recounted how the government hindered his business and powerful bureaucrats extracted rents every step of the way, from the stage where the product left the factory in trucks to the point where it was loaded into containers at ports. The process made a business manager a pehelwan or a strong wrestler able to deal with any eventuality, he said. Indian entrepreneurs have to beat their competitors and deal with a government that is not the most enterprise-friendly. Some of India's self-created barriers to entrepreneurship have made Indians entrepreneurs that much more hardy and competitive, mirroring the aspirational urge of India's people. Besides offering a large labor force of English-speaking people and a democratic system, India is also far more capital efficient . Since the early 1990s, India has invested about 25% of GDP and obtained an average GDP growth rate of about 6%. India is a better capital allocator, requiring four units of capital to generate one unit of output. As economist Niranjan Rajadhyaksha puts it, capital efficiency is the reason why India has few good roads but many world-class companies. For investors, return on invested capital is the metric to watch, and India widely outperforms on this metric. To make itself an even more attractive investment destination, India has also started taking steps to reform higher education, a key ingredient to drive economic growth through technology and innovation. India has only succeeded in creating special interest groups competing for admission into premier colleges based on identity rather than merit, and starved its citizens of world-class universities to the point that more Indian youth study abroad than any other nation. Education Minister Kapil Sibal has spoken at length on re-organizing the higher-education institutional framework at all levels and reducing government control on education. He sounds like he means business. From purely a development standpoint, India needs more investment from abroad in the form of both foreign direct investment and venture capital. Global investors are eager, and Indian entrepreneurs have demonstrated that they are a cut above the rest. It's now up to the state to ensure that it doesn't fritter away the merit of the Indian entrepreneur. The crouching tiger might spring a surprise.

A few developments Monday suggest some of the world's most inefficient energy users are starting to tighten up how they use their energy resources, with important implications for keeping a brake on crude prices down the road.

Staying efficient meets with approval.

The International Energy Agency said non-OECD oil demand is expected to be about 1 million barrels a day lower by 2013 compared with its previous projection due to rising efficiency efforts such as improved vehicle gas-mileage standards. India and other emerging markets have accounted for most of the increase in world oil consumption this decade.
What all this points to is that emerging markets are waking up to the fact that using energy more wisely puts money in consumer wallets, can help smooth out trade deficits and is better for the planet in terms of reducing carbon emissions. In its medium term 2008-14 report on oil industry trends, the IEA revised down its world oil demand forecast for 2013 by a hefty 3.35 million barrels a day, or 3.7%, from its previous estimate in December. McDonald's Corp. is planning on bringing the Chicken Maharaja Mac to more of India. Much of India's retail sector is struggling, with many of the malls thrown up to take advantage of the nation's recent red-hot growth struggling to resuscitate sales and traffic. But McDonald's has been largely unaffected by the slowdown and is planning on accelerating its rate of expansion on the subcontinent, according to Amit Jatia, managing director of McDonald's

The court's jurisdiction includes the state of Delhi, which includes New Delhi and some surrounding areas. This legal remnant of British colonialism has been used to deprive people of their basic rights for too long, said Scott Long, an official at the organization, which has opposed similar laws in other former British colonies.The p arts of the law struck down include consensual sex between adults. The court left intact provisions outlawing nonconsensual sex and sex involving a minor. The decision comes at the same time that the Indian government has said it is considering legislation to decriminalize homosexuality. The ruling will remain in place until those new laws arrive, the court said. The government can still appeal courts decision to India's Supreme Court, though it remains unclear if the government will take that step.

Now, Jet is scrambling to stay aloft. Low fares from no-frills competitors ravaged revenue. Staff costs soared as rivals poached pilots and mechanics. Airport congestion in India made for a logistical nightmare forcing Jet to open an international hub 4,000 miles from home, in Brussels. Amid a glut of capacity, Jet's market share slid from a high of almost 49% in 2003 to roughly 25% this year. The airline started posting sharp losses in late 2007. Jet eked out a net profit in its latest quarter by selling assets, slashing costs and booking tax credits, but the outlook remains tough. It's been hard, said Mr. Goyal, the 59-year-old founder, in an interview at his $15 million London townhouse. We were making so much money, and now we're losing money. The carrier's woes began as India's economy boomed in 2005, thus highlighting a broader problem for the global airline sector: Even in good times, the industry struggles to generate sustainable profits. U.S. carriers have lost billions of dollars in recent decades despite soaring passenger numbers. Jet Airways has similarly struggled to capitalize on growth as it got squeezed between uncontrollable costs and increasingly unfettered competition. Jet's slide can be traced to a sea change in the global aviation business. Deregulation, the rise of Internet ticket sales and other factors have made it easier than ever for upstarts to challenge bigger, established carriers. In India, where state-run carriers and government policies stymied air travel for decades, the sudden transition proved tumultuous. Last year was particularly rough. The airline business floundered as fuel prices surged, the credit crunch hit and world-wide travel plunged. Jet is reacting by cutting staff, closing offices around Asia and reducing flight frequencies. Searching for profitable routes, Jet recently took planes from India's crowded domestic market and expanded service to Dubai. It soon plans to start flying to Saudi Arabia. Mr. Goyal cut his teeth in the airline business by working and sleeping at his uncle's New Delhi travel agency while he was an 18-year-old student. Seven years later, in 1974, he started his own agency, bankrolled by personal savings and a gold bracelet of his mother's that he pawned. As the Indian sales agent for overseas carriers including Air France and Hong Kong's Cathay Pacific Airways Ltd., he learned the ins and outs of upscale air travel. Jet was one of several carriers launched after India began deregulating domestic aviation in 1991, and initial competition was fierce. Jet survived as rivals failed, thanks in part to Mr. Goyal's longstanding links to foreign carriers with which Jet cooperated to fly international passengers.Allthough Indian law had granted state-owned Air India a monopoly on foreign flights since 1953, Mr. Goyal prepared for the day that Jet would be allowed to extend its network overseas. He entertained politicians, aviation officials and travel professionals in his London townhouse overlooking tony Regents Park. I was convinced one day India would have to open up, he says. Anticipating the change, Mr. Goyal focused on creating a passenger experience to rival the world's best carriers. He poured tens of millions of dollars into cabin entertainment systems, ergonomic seats and staff training. He also turned the trend of outsourcing to India on its head by hiring American pilots, recruiting managers from leading Asian and European carriers, and unabashedly aping the innovations of up-market trailblazing airlines such as Singapore Airlines Ltd. Naresh Goyal's policy of hiring expats broke the mold in India he was a pioneer, says Craig Jenks, president of Airline/Aircraft Projects, a global aviation consulting firm in New York. In 2004, India allowed private airlines to fly overseas. Mr. Goyal jumped at the opportunity. He ordered 10 Boeing 777s, and fitted the first-class cabins with spacious private compartments modeled after those created by Dubai's upscale Emirates Airline. Jet's initial public offering in 2005 was 16-times oversubscribed amid national enthusiasm for the airline and its whole industry.

Jet Airways India Chairman Naresh Goyal, above, celebrates the carrier's new European hub at Zaventem Airport in Brussels in May 2007.

But Jet's success also spawned competition. Vijay Mallya, chairman of Indian brewing and distilling giant United Breweries (Holding) Ltd., launched upscale Kingfisher Airlines. It was meant to double as a flying promotion for his top beer brand, Kingfisher. A tiny upstart launched in 2003, Air Deccan, proved even more damaging to Jet. Copying the no-frills approach pioneered by Southwest Airlines Co., it served secondary cities that Jet didn't touch. Deccan opened a floodgate by showing the low-cost model could work in India. In 2005, a group of entrepreneurs started a similar low-cost carrier, SpiceJet Ltd. That same year, a major Indian travel-services company started its own budget carrier, IndiGo. Mr. Goyal fought back by acquiring no-frills competitor Air Sahara, which he rebranded as JetLite. indian carriers grabbed the spotlight at the 2005 Paris Air Show, the aviation sector's big industry event. There, they announced orders for planes valued at more than $15 billion. IndiGo ordered 100 Airbus airliners even before it secured government permission to start flying. Although Kingfisher had only been flying for two months, Mr. Mallya splashed out by ordering five Airbus A380 superjumbos, the world's largest passenger planes. India's growing middle class was helping tug the global aviation industry from its post-9/11 slump. Observed Airbus Chief Operating Officer John Leahy at the Paris Air Show that year. But the biggest growth story we see is India. Foreign investors, financiers and leasing companies, all hungry for new markets, raced to bankroll India's breakneck airline expansion. Indians who had long squeezed onto wheezing, sweaty trains began jetting about the country. Jet soon faced another hurdle: India's outdated aviation infrastructure clogged up. Air-traffic delays added 10% to flight times and cost $80 million in wasted fuel during 2006, Jet executives said, and things were getting worse. the average 70-minute domestic flight spends another 35 minutes circling, Mr. Goyal complained last spring. The lack of modern aircraft-maintenance facilities in India forced Jet to send planes overseas for routine upkeep, adding millions of dollars to its bills. The cost of retaining veteran mechanics, flight attendants and pilots soared as new rivals poached qualified staff. Even Jet's budget subsidiary, JetLite, and other no-frills carriers struggled. There are no low-cost airlines in India, only low-fare, no-profit carriers, Mr. Goyal said at a Jet media gathering in 2007. Yet Indian carriers kept chasing market share by slashing fares and adding planes, even as losses ballooned. By last June, Mr. Goyal saw that competition had made business untenable. We're all in trouble, he lamented at an industry conference, saying each domestic carrier should slash capacity by 30%. Kingfisher's Mr. Mallya scoffed that Mr. Goyal doesn't know how to do math. But Kingfisher was losing so much money that it soon canceled airplane orders and new routes vital to its overseas expansion. In a sign of the industry's distress, the bitter rivals last October announced an alliance to share airport facilities, coordinate schedules and reduce capacity. The deal still faces regulatory approval. Mr. Goyal had enjoyed a major edge over rivals in one key battleground: overseas flights. Indian deregulation in 2004 opened up international routes only to private carriers that had flown domestically for at least five years. Jet's experience allowed Mr. Goyal to move first, launching flights to Singapore, London and Kuala Lumpur in 2005. Jet quickly grabbed traffic from state-owned Air India, which had struggled to compete globally due to its poor service. Wealthy Indians who had preferred foreign carriers such as British Airways PLC were glad to have a local alternative. Ajit Balakrishnan, founder of India's largest Internet portal, says Jet staff deliver a superb product on the domestic flights he takes weekly from Mumbai, and so he jumped at the chance to fly Jet overseas. The 60-year-old veteran advertising executive often books on Jet, which began offering service to New York-area airports in August of 2007. He recommends Jet to foreign friends for its modern luxury. But Mr. Goyal's intercontinental ambitions faced huge obstacles at India's overtaxed airports. Flights from India to the U.S. or Europe require big planes to carry sufficient fuel, and big planes need lots of passengers to run profitably.In ma ture markets, airlines generally fill long-haul flights with traffic from many smaller planes arriving at a hub for connections. To coordinate this, airlines need lots of boarding gates, airplane parking spots and runways slots. India's major airports lacked all of them. Anxious to expand, Mr. Goyal hit on an unlikely option during a state visit to India by the King of Belgium in 2005: using the Brussels airport as a hub for North American-bound flights. The facility had sat largely empty since the collapse of national carrier Sabena four years earlier. Talks with Belgian officials at Mumbai's luxurious Taj hotel quickly yielded an action plan. It was a proper business meeting with an agenda, recalls Mr. Goyal, who was more accustomed to India's glacial bureaucracy. Winning regulatory approval for the unusual arrangement from Belgium and the U.S. took months, but by late 2007, Jet's wide-body airliners were arriving in Brussels each morning from Delhi, Mumbai and Chennai, mixing passengers and departing again for New York's JFK International Airport, Newark Liberty Airport and Toronto. Another three planes did the same trip in reverse. The four-hour Brussels stopover lengthens passengers' trip time compared with a nonstop flight. It also forces Jet to move hundreds of passengers and their bags quickly through a foreign airport at great expense. But thanks to close cooperation with the privately owned airport, which was hungry for business, Jet was able to offer nine different connections between Indian and North American airports, compared with only three connections possible with nonstop flights. but as fuel prices rose in 2008 and America's financial problems rippled to India's outsourcing operations, Jet flights through Brussels grew emptier. Costs rose. Only weeks after adding a seventh Brussels flight last Oct. 31, from Bangalore, Jet reversed course on Nov. 25 and canceled the route, citing economic turmoil. Jet now serves 60 destinations, including 19 outside India. The crisis has forced us to look much more closely at costs, Mr. Goyal said at his London mansion. Mr. Goyal says he remains committed to Brussels and predicts the North American operation will break even this summer. But many rivals doubt the long-term viability of a hub so far from home. It doesn't work, says Pierre-Henri Gourgeon, chief executive of Air France-KLM SA, which operates huge hubs in Paris and Amsterdam. Successful hubs rely on big traffic volumes, which Jet cannot guarantee, he says. Mr. Goyal says falling Indian wages now give him a leg up, because labor accounts for only around 15% of Jet's costs, compared with more than 20% for most Western carriers. Still, he says Jet will refocus on cutting costs and expanding in less-competitive markets of Bangladesh, Nepal and Sri Lanka. I want to learn how to buy my insurance for the next four years, Mr. Goyal said of his efforts to protect Jet. I'm the biggest shareholder, so I suffer the most.

Pranab Mukherjee, India's finance minister, center with briefcase, poses with his team outside the finance ministry on his way to present the budget for the financial year 2009-2010 at the Indian Parliament in New Delhi, India, on Monday, July 6, 2009.

The federal budget for the year from April 1 disappointed investors, who had hoped for clear signs the government would try to contain its ballooning debt and do more to deregulate the economy to attract foreign capital. Indian government bonds, stocks and the rupee swooned. Finance Minister Pranab Mukherjee, who announced the budget, projected the largest deficit in more than 18 years as he shied away from any big ticket reforms and unveiled a raft of steps that will increase total spending by 16%, mostly on education, healthcare and employment which will require the government to sharply ramp up borrowing. He projected the fiscal deficit will swell to 6.8% of gross domestic product in the current fiscal from a revised 6.0% last fiscal year, overshooting its previous forecast of 5.5%. The government forecast gross borrowing of 4.51 trillion rupees ($94.35 billion). It plans to spend 10.21 trillion rupees this fiscal year, far higher than expected revenue of 6.14 trillion rupees. Those of the view that the budget would encompass all sorts of exciting structural economic reforms have just had their hopes firmly dashed, Instead this was largely a populist budget focussed mainly on the poor with plenty of promises of additional infrastructure spending. Standard & Poor's sovereign rates the projected fiscal deficit was within the boundary of S&P's expectation, indicating that the news wouldn't likely prompt an immediate credit rating downgrade to junk. In February, S&P lowered its long-term sovereign credit rating outlook to negative on India's BBB- long-term and A-3 short-term ratings. Still, some analysts expressed concern the government's finances could deteriorate further. government borrowing is likely to be revised upward even further, increasing the risk that the fiscal deficit may hit 7% of GDP in the current fiscal year. Investors had hoped the newly-elected United Progressive Alliance government would use its resounding victory in May's election to push through some long-stalled reforms to attract foreign investments while at the same time putting a lid on borrowing. Monday's news, therefore, was taken poorly by financial markets. At 0845 GMT the benchmark 6.07% 2014 bond was trading at 98.48 rupees, down from 98.78 rupees pre-budget announcement. The Bombay Stock Exchange's 30-share benchmark Sensitive Index plunged 5.3% to 14,114.67 from the day's pre-budget high of 15,097.87. The dollar gained against the rupee, rising to 48.48 rupees following the slump in local shares, from 47.88 rupees pre-budget announcement. Federal Finance Secretary Ashok Chawla said the government would try to ensure that its increased borrowing doesn't disrupt the market and crowd out private investment. Open market operations may be needed for about 50% of gross market borrowing, he also said at a news conference. The Finance Bill, which includes the budget proposals, is likely to be passed by Congress-majority led lawmakers in the Parliament by Aug 7. The heavy spending earmarked for the current fiscal year reflects the government's effort to ensure a recent rebound in economic growth gains momentum. The economy, which depends far less on exports than many other countries in Asia, has pulled through the global downturn in relatively sound shape. India's economy grew 6.7% last fiscal year, slowing from a 9% expansion in the previous year. The annual Economic Survey projects that the economy will grow between 6.25% and 7.75% in the current fiscal year. Mr. Mukherjee, who presented the budget before India's parliament, said sustaining 9% economic growth in the medium term remains a priority, though he acknowledged that might not be easy to achieve.. While global financial conditions have shown improvement over recent months, uncertainties relating to the revival of the global economy remain, Mr. Mukherjee said. Therefore, we can't afford to drop our guard. We have to continue our efforts to provide further stimulus to the economy, he added.Prime Minister Manmohan Singh said the budget will help accelerate economic growth. A 7% economic growth is achievable, but it's not enough. We should aim for 8%-9% growth in the medium term, Mr. Singh said after the budget announcement. Mr. Mukherjee, speaking on state-run television after Monday's budget announcement, said recent tax breaks and higher infrastructure spending will spur domestic demand, helping the economy toward achieving 9% growth next fiscal year. Under the proposed budget, the government has bet on a spurt in non-tax revenue from selling stakes in state-run companies to raise funds. But the government won't cede majority control in state-run companies where it plans to sell stakes, Mr. Mukherjee said.India now aims to raise 1.4 trillion rupees in non-tax revenue, of which 11.2 billion rupees will be through sales of stakes in state-owned enterprises, Mr. Mukherjee said. The government will sell stakes in Manganese Ores Ltd. and Rites Ltd., according to the budget document. Mr. Mukherjee said the government will continue to capitalize banks and insurance companies. Though the government kept corporate tax rates unchanged, it raised personal income tax exemption limits to keep more money in hands of consumers. Though the government has stepped up spending, it's not matched by a similar spurt in revenue flow, oil bonds and also toward fertilizer sectors will add strain to government's finances. The government plans to issue 103.06 billion rupees worth of oil bonds to compensate state-run fuel retailers, which are mandated to sell products at discount to prices prevailing on global markets, where they buy oil. The government plans to pay 499.8 billion rupees in fertilizer subsidies, spend additional 10 billion rupees in irrigation and extend farm loan waivers to rain starved farmers to help push a 4% farm output growth in the current fiscal year.