Vodafone Asked to Pay $554.

1 Million
in Indian Tax Case

NEW DELHI –India's top court Monday asked Vodafone International Holdings B.V., a unit
of U.K.'s Vodafone Group PLC., to pay 25 billion rupees ($554.1 million) within three-weeks
time and set Feb. 24 as the final date for an appeal hearing.

The appeal is against a lower court ruling that permitted a tax claim on the company's 2007
acquisition of a majority stake in Hutchison Essar Ltd. India's tax department had sent
Vodafone International a tax demand of 112.18 billion rupees ($2.52 billion), including
interest. Vodafone has said it "strongly disagrees" with the tax calculation.

The court registry payment of 25 billion rupees that was announced Monday, will be paid
back to Vodafone if the company wins the court case. A three-judge panel asked the income
tax department to provide a guarantee that it would bear the applicable interest on the 25
billion rupees deposited by Vodafone if the company wins the appeal.

The court, headed by Chief Justice S.H. Kapadia, also asked Vodafone International to
provide a bank guarantee worth 85 billion rupees with a state-run bank in the next eight
weeks.

India's tax department says Vodafone International failed to withhold tax when it paid $11.2
billion to buy Hong Kong-based Hutchison Whampoa Ltd.'s 67% stake in Hutchison Essar.
Hutchison Essar was renamed Vodafone Essar after the stake transfer. Tax department
officials couldn't be immediately reached for comment.

Vodafone has since claimed that the Indian government is not entitled to tax the transaction
since it was agreed outside India by two foreign companies.

Meanwhile, Vodafone said in a statement that it has been in talks with the Dutch
government which probably appealed to an India-Netherlands tax treaty to resolve the
dispute.

"The Dutch government's intervention is a standard mechanism which can be invoked

between countries to review tax matters," Vodafone said Monday, responding to local media
reports.

During its address in court Monday, company lawyers reiterated that the deal wasn't taxable
in India.

India's Central Board of Direct Taxes had calculated capital gains of

374.14 billion rupees on the transaction. The tax on the gains was
calculated at 79 billion rupees as of Feb. 11, 2007, the board said.
India Economic Summit: The Rural
Conundrum
One thing that is obvious to all is that fixing - sorry, implementing - India is a
complex, uphill task. Otherwise why would there be hundreds of millions of Indians
living in abject poverty in a nation that has a fast-growing economy and is held up as
a world power?

The problem is that it is often easier to find the faults rather than the solutions, as
was on full display at the first session Monday on rural India at the India Economic
Summit — subject, “Implementing India” — hosted in Delhi this week by the World
Economic Forum and the Confederation of Indian Industry.

When asked by moderator Nik Gowing of the BBC to come out with specific ideas
that would improve lives in rural areas, O.P. Bhatt, chairman of the State Bank of
India, fell back on reciting the well-known statistics that define the problem but not
the solution: 700 million people, 2.5 times to population of the U.S. or Europe, live in
rural areas where 300 million are poor, he said.

Arvind Mayaram, additional secretary and financial adviser at the Ministry of Rural
Development, offered one interesting-sounding example of a partnership program
between government and industry where government essentially hands over
development and management of civic infrastructure to private companies in a 10-
year management concession. He conceded that the government isn’t getting a
good return on its investment in rural India and is looking to this model to give it
much better bang for the buck.

Sounds great, right? Except Ben Verwaayen, CEO of Alcatel-Lucent, took issue with
the idea that government was spearheading the solution when it didn’t let telecom
companies share spectrum that would improve rural Indians’ ability to be connected
to the broader world. At which point the session rather devolved into a discussion
about the meaning of connectivity - no doubt important but not something that many
rural Indians would be interested in debating at the expense of concrete steps to
improve livelihoods. The proper role of government was also in dispute but the
general opinion seemed to be that government needs to set the stage, define the
issue, then get out of the way to allow entrepreneurs to innovate. As we all know,
much easier said than done.

Mr. Verwaayen came up with perhaps the best effort to reconcile all this when
everyone agrees that fixing and developing rural India is a massive issue for the
future of India yet fruitful efforts are few and far between: “The size of the problem is
so big that it can’t be a problem, it has to be an opportunity.”
Yes, but what opportunity exactly?
Have a concrete idea that you think will improve lives in rural India? Please leave it
in the Comments.

Inflation Threatens China's Growth

China is seeing the highest price increases in over two years, and this has officials
worried. While the official consumer inflation rate was 4.4% for October, a 10% rise
in food prices is having a huge impact on poorer households. The domestic media is
filled with stories of hoarding by both producers and consumers.

The government has responded with a small

interest-rate increase and some hikes of the
reserve requirement, though rates on demand
deposits have not budged at all. More action
is needed. A resolute drive to slow growth of
the money supply will stop the hemorrhaging
of household savings due to inflation. As an
added bonus, it may also wean China off of
its heavy dependence on investment-driven
growth.

The recent bout of inflation may seem mild in comparison to the double-digit price
rises in the 1980s and '90s. But the social impact may be almost as severe.
According to research by a Chinese government think tank, poorer households now
face inflation that is twice the overall rate because their consumption basket is
dominated by food items, which have seen the most rapid price increases. So even
though wage gains seem robust, many households are seeing flat or negative
increases in purchasing power.

Household savings have also been eroded by government policies to control deposit
interest rates. After the recent 0.25-percentage point lending-rate hike, the rate paid
on demand deposits did not budge. Even without inflation, depositors are paid
artificially low rates because the government prevents banks from setting their own
deposit rates. In times of inflation, households, especially poorer ones with money
mainly in demand deposits, suffer negative returns on their savings.

Savings in demand-deposit accounts today yield negative returns after adjusting for
inflation, for a real return of about -4%. Even net of inflation, deposits in a one-year
time deposit earn -2%. Meanwhile, banks are earning large margins, and borrowers
of medium- to long-term corporate loans, which tend to be state-owned or state-
dominated firms, are borrowing at an inflation-adjusted rate of about 2%. Given that
households currently have more than 11 trillion yuan ($1.7 trillion) in demand
deposits, an annual inflation rate of 4% this year would in effect see the transfer of
over 400 billion yuan ($60 billion) from these households to banks and corporate
borrowers, both dominated by the state.
This erosion of poor households' purchasing power goes directly against the goal of
"raising the income of medium and low income urban and rural residents," as
outlined by the Party plenum last month. Given that nominal wages for a large
number of households remain relatively flat, continual inflation alone will drive many
into destitution. The pressure from negative earnings on savings has driven richer
households to speculate in the real estate and stock markets. Rising inflation has
further incentivized all households to begin stockpiling food and commodities such
as gold. Food hoarding, if sufficiently widespread, can further increase inflationary
pressure.

Although inflation might have been boosted by some recent supply shocks, the rapid
expansion of the money supply in recent years, especially the spectacular explosion
of lending last year, is the root cause. Thus, a key ingredient of future inflation
fighting will be to slow down substantially the expansion of money supply.

In the past, the Chinese government has successfully stifled inflationary pressure via
the imposition of a resolute credit ceiling on banks. Today, regulators would also
need to monitor closely the expansion of trust products and the inflow of hot money.
The People's Bank of China and the China Banking Regulatory Commission have all
the tools necessary to fight inflation. A combination of interest rate hikes, a credit
ceiling, a freeze in trust product issuance and aggressive sterilization of foreign
exchange inflows can halt inflationary expectations and stop the erosion of
household savings. China's top leadership, however, needs to make clear its
collective determination to fight inflation in order to give these measures credibility.
To be sure, the sudden slowdown in credit expansion will cause illiquidity in some
investment projects and slowed real-estate construction. Nonperforming loan ratios
may rise as cash-starved projects become unable to meet interest payments.

In the medium term, however, the policy will pay benefits. Macroeconomic
retrenchment credibly commits the government to both low inflation and a less
investment-intensive growth path by cutting off liquidity from a large number of
projects. Local authorities will learn that they can no longer pursue growth based
mainly on adding new investment projects financed by bank loans and bond
issuance.

In the mid- to late-1990s, cash-starved local authorities became much more open to
privatization, allowing private firms to dominate sectors previously monopolized by
state-owned firms. The competition that resulted was good for the economy.
Repeating that process will not be painless, but past experience has shown that
resolute macroeconomic retrenchment can put China on a healthier path for growth.