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CVC analysis shows lending habits to blame for most bank frauds

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If there is one single theme that dominates the Central Vigilance Commission (CVC) analysis of the top 100 bank frauds in India, it is the lax credit culture at banks, especially state-owned lenders.

Yes, borrowers have resorted to a host of fraudulent activities such as inflating the value of goods, fudging financial statements, diverting money to shell companies and so on, but the CVC analysis shows that most of these threw up enough red flags. That suggests willful ignorance of such red flags either owing to incompetence, laziness or corruption.

These are the same reasons why banks are sitting on almost Rs 10 lakh crore of bad loans. As for frauds, Reserve Bank of India showed that there were 5835 frauds reported in 2017-18 worth Rs 41,000 crore. There was a significant number in both the volume and value of frauds. Public sector banks accounted for 85 percent of frauds, higher than their business share of 65-75 percent.

That frauds and the bad loan crisis owe a lot to mismanagement can be seen from the fact that frauds reported by those banks under RBI’s prompt corrective action (PCA) framework were “well in excess of their relative share in credit,” according to the central bank.

The CVC analysis shows the lacunae in the credit appraisal and monitoring process. In many cases, banks did not do proper due diligence on borrowers. In case of consortium lending, members banks failed to carry out due diligence independently and relied on the lead bank entirely.

The CVC report is scathing about some of these arrangements. In one example, it said that the “exchange of information was more a ceremonial formality rather than to sift the data. The lead bank did not share the areas of concern.”

In yet other cases, banks and their credit officers did not have the necessary competence and skills to appraise the technical aspects of projects and blindly accepted whatever was stated by the borrower.

One example is the case, where banks financed a company based on brand valuation, which was done by a private company. Later this brand value was found to be inflated; whether it is incompetence or corruption is another question altogether.

Forget specialist knowledge, in some cases, basic red flags were ignored. For instance, branches failed to get confirmation from debtors of their customer. In one case, they did not see that working capital exceeded the sales in an account by a large margin and was much higher than that of industry peers. In another case, a company produced a use-of-funds certificate that was signed by an auditor other than the one who audited the company’s balance sheet. Regional and controlling offices failed to notice that their reporting branches discounted cheques beyond their delegated powers on several occasions without obtaining permission/ approval.

The CVC’s suggestions to plug these gaps is just common sense for the most part. It suggested that banks delist third-party experts such as auditors with questionable credentials. It has asked banks to pay more attention to internal control systems and improve oversight, and have proper working capital assessment.

It has asked new members in a consortium lending framework to check with other banks before advancing and enhancing credit limits. In sum, these recommendations say that banks should do proper diligence and monitoring.

Banks would do well to improve the use of information technology in improving oversight too. In the case of Punjab National Bank, the failure to connect its core banking system to the SWIFT messaging system was one key reason why a $2-billion fraud went undetected for several years.

Secondly, as this column has argued earlier, there needs to be better utilisation of human resources, especially in state-owned banks. They need to move to a system where merit is rewarded, and specialist/professional skills are recognised. Banks can improve their credit assessment capabilities by hiring specialists and having flexible compensation policies.

The government and the regulator should seriously consider the CVC report and implement the suggestions to improve governance. Frauds are a big bottleneck to the flow of credit and should be tackled quickly in a country where bank finance is still the dominant source of funding.

Warehousing industry may grow at 13-15% in medium term: Report

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The warehousing industry in the country is expected to grow at 13-15 percent in the medium term, driven by the growth in manufacturing, retail, FMCG and e-commerce sectors, said an October 16 report.

Growth in overall production and consumption, organised retail, logistics outsourcing and regulatory interventions such as WRDA Act and GST have improved prospects of the organised professional warehousing segment, Care Ratings said in its report.

Private investments in logistics and other infrastructure developments such as dedicated freight corridor (DFC) will also aid the segment growth, it added.

"The domestic warehousing industry grew from Rs 56,000 crore in 2013 to Rs 77,000 crore in 2017, and is expected to grow at a rate of 13-15 per cent in the medium term," the report said.

However, it added that the overall growth potential is limited by challenges like limitations in infrastructure connectivity, need for large capital and issues related to land acquisition.

The country's warehousing market is highly fragmented, with most warehouses having an area of less than 10,000 square feet, it said, adding about 90 per cent of the warehousing space is controlled by unorganised players.

The report said nearly 60 per cent of the modern warehousing capacity is concentrated in the country's top six cities namely Ahmedabad, Bangalore, Chennai, Mumbai, NCR and Pune, with Hyderabad and Kolkata being the other big markets.

"Going forward, due to factors like quality of infrastructure and availability of labour, these advantages are likely to remain with these cities," it added.

Care Ratings pointed out that the domestic industrial warehousing segment is expected to grow due to anticipated increase in global demand, growth in organised retail and increasing manufacturing activities, expansion of e-commerce options and growth in international trade.

It is also expected to witness significant activity as the presence of the unorganised segment is expected to reduce and the companies would be rationalising and consolidating their space requirements based on time to serve the market and not taxation, the report said.

The demand for agriculture warehousing is expected to grow moderately, according to the report, on account of high base and expected normal monsoons.

Integrated models, diversification across end-user industries are expected to drive growth of cold chain segment. Significant demand is also seen coming from storage of fruits and vegetables, and pharmaceutical segments, it said.

Fuel excise duty cut 'credit negative' for India, fiscal deficit may slip to 3.4%: Moody's

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The excise duty cut on petrol and diesel is credit negative for India as it will reduce government revenue and increase fiscal deficit by 0.1 per cent to 3.4 per cent of GDP in the year ending March 2019, Moody's Investors Service said on Tuesday.

Also, the earning of public sector oil marketing companies (OMCs) would be "negatively affected" as they also absorbed Rs 1 per litre cut in their pricing, Moody's said.

The government on Friday cut excise duty on petrol and diesel by Rs 1.5 a litre, sacrificing Rs 10,500 crore revenue in the current financial year.

"Overall, excise duty cuts are credit negative because they will reduce government revenue collection and increase India's fiscal deficit," Moody's said in a statement.

The US-based rating agency said these measures create downside risks to the central government's fiscal deficit target of 3.3 per cent of GDP for fiscal 2018.

"Because the government had already met 94.7 per cent of the budgeted annual deficit by August 2018, to achieve its deficit target it will likely need to compress capital expenditure. Consequently, we expect the central government deficit target to slip modestly to 3.4 per cent of GDP, while the combined general government deficit (central and state) should remain at about 6.3 per cent of GDP," Moody's said.

It said that the government revenue from excise duties on petroleum products has more than doubled since fiscal 2014. State governments charge value added tax (VAT) on fuel as a percentage of prices and have therefore benefited from rising oil prices.

The centre had appealed to state governments to cut VAT rates on petrol and diesel by Rs 2.5 per litre, following which several BJP and NDA ruled states like Maharashtra, Gujarat, Uttar Pradesh, Tripura, Assam, Jharkhand, Haryana, Himachal Pradesh and Madhya Pradesh followed suit.

On government asking OMCs to absorb a Rs 1 per litre in their pricing, Moody's said even as the government so far has been committed to market-based pricing, going ahead there are risks to going back on deregulation.

"However, with important state elections at the end of this year and the general election next year, the risk of backsliding on these commitments will increase if oil prices remain elevated," it said.

India deregulated petrol and diesel prices in 2010 and 2014, respectively, and moved to daily revision in fuel prices in June 2017.

Moody's said the fuel excise cut is expected to have a limited effect on GDP growth.

"Although lower excise taxes will help offset some of the negative effect on household consumption from higher oil prices, a depreciating rupee and potential curtailment of government spending will likely mute the benefits. We continue to expect real GDP growth of about 7.3 per cent in fiscal 2018 and 7.5 per cent in fiscal 2019," it said.

However, intensifying external headwinds (tightening global financial conditions, high oil prices and trade tensions) and tightening domestic credit conditions present downside risks to our forecasts, Moody's noted.

Moody's had last year raised India's sovereign rating for the first time in over 13 years to 'Baa2' on growth prospects boosted by continued economic and institutional reforms.

India to ship first consignment of common grade rice to China

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India will send its first consignment of common grade rice to China on Friday, the government said, following intense lobbying by New Delhi after relations thawed between the two countries.

A consignment of 100 tonnes would be shipped to China National Cereals, Oils and Foodstuffs Corp (COFCO), one of China's state-owned food processing holding companies, India's Ministry of Commerce and Industry said in a statement on Thursday.

China is a leading importer of rice and sugar, while India is the world's biggest exporter of rice.

Prime Minister Narendra Modi finalised an amended agreement in June related to the export of non-basmati varieties of rice from India to China.

New Delhi is concerned about its rising trade deficit with China, and has sought greater access to the world's second-largest economy for agricultural products including rapeseed, soybeans and sugar.

Lenders, shareholders may come to the rescue of debt-laden IL&FS

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Lenders and shareholders may consider rescuing Infrastructure Leasing & Financial Services (IL&FS) to avoid a contagion effect on the entire financial market in India. The saving grace may come with a caveat that the infrastructure lender will have to create a tangible plan to monetise its assets.

A rescue package will be discussed in the meeting IL&FS has with the Reserve Bank of India (RBI) and shareholders on September 28, a day ahead of the its board meet.  A banker, part of one of the large shareholders of IL&FS said: "We had plans to sell stake in it as part of our non-core asset sale. So, we will definitely not lend more, but will have to wait and watch what the RBI says on Friday."

The government along with the banking and markets regulator RBI and Securities and Exchange Board of India (SEBI) have assured intervention and “appropriate action, if necessary”.

HDFC (Housing Development and Finance Corporation), one of its largest shareholders with 9.02 percent stake in IL&FS, will not attend the meeting. Earlier, it had refused to extend loans to IL&FS.

The recent defaults by IL&FS on its interest payments to its bondholders have triggered concerns in the debt market about a cash crisis arising out of increase in non-performing assets (NPAs) in non-banking financial companies (NBFCs), especially Dewan Housing Finance Ltd (DHFL) and Indiabulls Housing Finance. This caused ripple effects in equity stock markets, which crashed to nearly 1,500 points on September 22.

The crash followed DSP mutual fund selling its bond holdings of DHFL, which caused fears among investors of further defaults after the IL&FS, where the first signs of trouble emerged in June.

Liquidity infusion

“The only way the situation can be salvaged is if LIC (Life Insurance Corporation of India) and other lenders come in with Rs 4,000 - 5,000 crore worth of liquidity infusion. This will give reassurance to the market that large institutions will come forward to bail them out,” a senior banker said.

“We will look at what assets could fetch money in the shortest time possible, else some lenders are threatening legal action (going to the insolvency courts). Although, we need to look what IL&FS has to offer and what kind of hair-cuts (losses) we will have to take,” another lender said.

Given the large shareholding by government-backed institutions — LIC with 25.34 percent stake, Central Bank of India (7.67 percent) and State Bank of India (SBI, 6.42 percent) — the government could facilitate the sale of its assets to avoid a financial crisis at IL&FS and its consequent impact on other financial institutions.

IL&FS had defaulted on inter-corporate deposits and commercial papers (borrowings) worth about Rs 450 crore. In September, it defaulted on two of its bond maturities. Over the past two to three months, at least three rating agencies downgraded its long-term ratings.

As a result, the infrastructure giant, which is credited for building the longest tunnel in the country (the Chennai-Nashri tunnel), no longer carries an investment grade rating. This has made it difficult for the company to raise money from the market from here on.

Also Read: Debt and defaults: What happened to IL&FS?

“If the investors in debt funds start panicking, there could be a further contagion effect. Some of the NBFCs have very high leverage, the debt-to-equity ratio of some NBFCs is 11 or 12 times. That is a cause of concern particularly if there is an ALM (asset liability management) mismatch,” according to one of the bankers quoted above.

An ALM mismatch happens when you have funded long-term assets with the help of short-term liabilities. This means your repayment is due much before you get the cash from the assets, the banker explained.

A senior analyst said, “Fundamentally, IL&FS is strong but they have temporary pain. They had plans to monetise assets and raise sizeable equity but now that getting delayed, they have some money stuck with the government as well. So, if they manage to get a good price for their assets, they can assure the investors who can bring in money at this moment.”

As per IL&FS, it is due to receive Rs 16,000 crore from concession-granting authorities, which, if cleared, would help solve its liquidity problems. However, the government maintains the dues are much lower.

As on March end 2018, IL&FS’s total outstanding debt was Rs 91,091.31 crore at the group level, with most of the operating assets with its subsidiaries. Around Rs 5,756 crore worth of debt is due for repayment in the next one year.

However, with the resignation of top officials in IL&FS and its subsidiaries, it remains to be seen if the regulators and government can rescue the debt-strapped firm and contain the epidemic of default that could spread to other financial institutions. Or whether they will let IL&FS find its own destiny through the market.

Hike in small savings rates: Government may reduce H2 market borrowing

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The hike in interest rates on small savings schemes would help the government collect higher amounts from the National Small Savings Fund (NSSF) and may also help reduce it's market borrowing for the second half of FY19, according to a report.

The government on Thursday raised interest rates on small savings schemes, including NSC and PPF, by up to 0.4 percent for the October-December quarter. Interest rates for small savings schemes are notified on a quarterly basis.

"We expect small savings schemes to provide an attractive alternative to bank deposits in the coming months, which should help the government to avail a higher net amount from the NSSF, compared to its target of Rs 1 trillion in FY19," rating agency Icra said in a report.

This may result in the government announcing a market borrowing programme for the second half of FY19, which may be smaller than what has been expected so far by the markets, it said.

In March this year, the government had indicated that it would borrow a net amount of Rs 1 trillion from the NSSF to fund its fiscal deficit in FY19, up from the budgeted amount of Rs 0.75 trillion, and reduce government bond issuance by an equivalent amount.

For the current financial year, the government had indicated its plans to borrow Rs 4.07 lakh crore from the market. In the first half, it plans to borrow Rs 2.88 lakh crore from market.

The government increased the interest rate for the five-year term deposit, recurring deposit and Senior Citizens Savings Scheme to 7.8, 7.3 and 8.7 percent, respectively.

The report said the Reserve Bank would likely increase repo rate by 25 basis points in the October policy due to looming inflation risks, the robust GDP growth print for first quarter of FY19 and the continued weakening of the rupee.

"This is likely to be accompanied by a change in stance to withdrawal of accommodation, to signal another potential rate hike in the December 2018 policy review, unless inflation risks recede appreciably during the third quarter of FY19," the report said.

It said the systemic liquidity in the banking system is expected to tighten in the second half of FY19, on account of the upcoming harvest, festive and marriage season, state elections and busy season for credit.

While this would nudge banks to increase deposit rates in the third quarter of the current financial year, the extent of the same would lag the overall increase in the repo rate and the magnitude of the recent revision in small saving rates, the report said.

Merging 3 PSU banks a bold step by Modi govt, can set path for future mergers

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The announcement of merger of three public sector banks — Bank of Baroda, Dena Bank, and Vijaya Bank — took everyone by surprise. While the general talk of consolidation of PSU banks has been going on for a while, no one expected such a specific announcement. Analysts and observers of public sector banks (PSBs) suffering from a general malaise due to the non-performing asset (NPA) situation, have suddenly found something exciting to discuss.

We should welcome this announcement. This is the boldest move that any government has made about PSBs since they came into being. This merger could deliver several very positive benefits not just for these banks but also for the broader banking and finance sector and indirectly for the Indian economy.

First, it reduces the governance challenge for the government, in that it has two fewer banks to find good CEOs for, two fewer boards to appoint, and two fewer entities to audit. In the past few years, we have seen many PSBs with long spells without a CEO and inadequate boards highlighting the challenge government faces in making appointments. Setting up of the Banks Board Bureau appears not to have had much impact on this process. So, having to make fewer appointments will be a relief for the government.

Second, it creates a larger bank. Banking business has sizeable economies of scale and larger banks tend to me more efficient that smaller, sub-scale banks. The Indian banking sector is excessively fragmented where even the largest of the Indian banks are puny by global standards. Among the large economies, India has the third most fragmented banking sector behind the United States and Germany.

Economies of scale will continue to increase with increasing investments in technology. A more consolidated banking sector with fewer and larger banks is also likely to be more resilient. It is interesting to note that in the global financial crisis, two developed economies whose banking sectors were least impacted were Australia and Canada, both of which have consolidated banking sectors with a few dominant, large banks along with a number of much smaller specialist banks.

Third, this merger will help these banks deal with the large-scale retirement of senior management that they are going to face in the next few years. Pooling of the managerial talent in the combined entity would allow more efficient deployment over larger businesses and operations thereby easing the challenge presented by retirements.

Fourth, it will reduce the urgency of capitalisation of financially the weakest of the three banks (Dena). Relatively healthier balance sheets and capital levels of the other two banks would effectively eliminate the immediate need for any capital infusion on part of the government. In a year where government finances are already stretched, even a small relief on this count is welcome.

Fifth, there are potential synergies that can be realised in a merger. There could arise from economies of scale and scope, cross-selling products of one bank to the customers of the other, rationalisation of the branch network, etc. The extent and the sources of synergies will have to be carefully worked out and a programme developed to realise them as the banks are integrated.

While there are clearly benefits in this merger, it is important to also note that the mergers of this kind is not a panacea for all the challenges facing PSBs. The most pressing one, the problem of NPAs, will not be solved by just merging these banks. It will require fixing deeper institutional weaknesses. However, if the number of PSBs reduces from the current 21, then there will be fewer entities to be fixed.

Any merger is challenging, even for privately-owned and managed companies who regularly engage in mergers and acquisitions. All the stakeholders — employees, customers, vendors, shareholders, regulators — have to be carefully managed through the process. Communication is crucial. Synergies that seem obvious on paper are harder to realise in practice. On the other hand, a poorly-managed integration can impose costs and business disruptions. The integration process requires skilled and careful management. This is a merger of three entities, each with a long history, culture, tradition, and a large organisation (together over 85,000 people) which will be even more complicated than more common merger of just two entities.

PSU banks have not had any experience in this area and hence will have to find skills in managing the integration. The process will also require regulatory support — the merging banks may need temporary exemptions from single borrower exposure norms, approvals for consolidating branches within close proximity, etc. PSU banks are governed by the Nationalisation Act, which means that this merger will also requires approval from both houses of the Parliament.

Overall, this is a good move for the banking sector and if executed well can set the path for future mergers among PSU banks which will strengthen the banking sector in India. We should all hope for a conspicuously successful merger.

5 ways Trump's tariffs on $200B in China goods could be felt

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By imposing taxes on an additional $200 billion in Chinese goods, President Donald Trump has intensified a battle of wills between the world's two largest economies and the outcome is far from certain.

No one knows how long the tariffs announced Monday might last. No one knows if Beijing will yield as pressure builds or instead stiffen its resolve and keep retaliating. No one knows if a politically divided United States will serve to undercut Trump's aggressive tactics.

But what's clear is that the latest fight in the escalating trade war is likely, one way or another, to affect consumers, companies, markets, the economy and the political landscape.

And how all that plays out could determine whether Trump's negotiating gamble proves a triumph or a failure. Here is a look at 5 potential consequences:


Unlike the first two rounds of tariffs totaling $50 billion, the new taxes launched by Trump would more directly hit American consumers. As counterintuitive as it might seem, the president sees this fact as ultimately helping US workers. In the end, he calculates, some short-term pain will lead to new trade policies and accords that will prove more favorable to American companies and individuals.

"As president, it is my duty to protect the interests of working men and women, farmers, ranchers, businesses, and our country itself," Trump said in a statement.

Starting Monday, the United States is to begin charging a 10 percent tax on thousands of Chinese imports - tires, windshield wipers, baseball gloves, bicycles, snakeskin pants, backpacks, trombone cases, refrigerators and wooden furniture, among others. The list runs 194 pages.

Unless the administration reaches a truce with Beijing, Trump's import tax will jump to 25 percent in 2019. What's more, if Beijing retaliates, Trump says he's ready to impose tariffs on an additional $267 billion in Chinese goods.

The result could be higher prices for American consumers, because most companies are expected to pass on the cost to their customers. After Trump announced tariffs on washing machines toward the start of 2018, the price for laundry equipment shot up 16 percent between February and May, according to an analysis by Mark Perry, an economics professor at the Flint campus of the University of Michigan and a scholar at the American Enterprise Institute, a conservative think tank.

The tariffs could put a dent in consumer spending, though many economists think the impact on the overall economy will be minimal.

"The mere talk of tariffs on all remaining Chinese imports is of serious concern to retailers since tariffs of that magnitude would touch every aspect of American life," said Matthew Shay, chief executive of the National Retail Federation, a trade group for retailers.


Many companies have warned that Trump's tariffs threaten to disrupt their businesses and depress their revenue.

The monthly manufacturing index by the Institute of Supply Management noted that some companies have expressed concern about tariffs despite an otherwise robust US economy. One food and beverage firm in the ISM survey said, "Suppliers appear to be bracing us for cost increases, given increased talk of tariffs and inflation.

" Trump's tariffs, with their uncertain duration, make it difficult for companies to plan for the future. Ted Murphy, a trade lawyer and a partner at Baker McKenzie, said the president is signaling that many companies will need to rethink their operations.

No longer can they ignore tariffs, which were low and mostly headed lower before Trump took office. They now need to rethink the supply chains they've built across countries and calculate where best to deploy workers.

"They're definitely going to move jobs," Murphy said. "What Trump is doing is increasing the cost, and he's introducing uncertainty into trade relations. Businesses can deal with costs. It's the uncertainty they can't deal with."


So far, at least, the stock market has taken the threats of tariffs in stride. Share prices have dipped, only to then resume their growth, in part because of deep corporate tax cuts that took effect this year and a solid US economy in its 10th straight year of expansion.

But the new round of tariffs risks triggering a more alarming response by investors. The additional taxes suggest that the two countries are struggling to make progress in settling their differences. The issues include Chinese companies' theft of US intellectual property and a widening trade gap as US consumers have become more dependent on comparatively cheap Chinese imports.

"It's definitely a setback for the market that they can't seem to get to the table," said J.J. Kinahan, chief market strategist for TD Ameritrade.

Kinahan said technology companies seem especially vulnerable to retaliation from Beijing, which could include tariffs on components as well as restrictions on access to websites and services.


A prolonged trade war between the United States, the world's largest economy, and China, the second-largest, would ripple through the rest of the globe, potentially affecting economies from Buenos Aires to Istanbul.

Tariffs could translate into less trade, which could hinder growth in smaller nations. The US dollar has already begun to rise in value as trade tensions have mounted. This has insulated the United States from higher prices.

But the higher-valued dollar has also diminished the value of the Turkish lira and the Argentine peso, among others. This trend has weighed heavily on their economies. In the meantime, the value of the Chinese yuan has dropped relative to the dollar, making it easier for Beijing to withstand US tariffs.

Many emerging economies depend on shipping commodities to China. If the Chinese economy slows under the weight of US import taxes, the global economy might also stumble, according to Stephanie Segal, deputy director of the Center for Strategic and International and Studies, a Washington think tank.


The Republicans' control of the House and the Senate is at stake in the midterm congressional races in November. Trump has portrayed the import taxes as a winning electoral issue because they're forcing other countries to compromise with the United States.

But public opinion suggests that his tariffs could prove a vulnerability. A poll released Aug. 24 by The Associated Press-NORC Center for Public Affairs Research found that 61 percent of Americans disapproved of the president's handling of trade negotiations.

If Democrats win, it would possibly repudiate Trump's approach. But if many Republicans retain their seats, it could vindicate Trump's choice to announce tariffs so close to the elections. Democratic Sen. Heidi Heitkamp clearly regards the new Trump tariffs as potentially helping her in a tough re-election contest in North Dakota. She immediately denounced them Monday night as crushing farmers who ship crops to China.

"Many family farms are afraid they won't be able to pay the bills if this misguided trade war continues," Heitkamp said in a statement. "There are smart ways to deal with China's cheating on trade, but stepping on our farmers is not one of them."

5 ways Trump's tariffs on $200B in China goods could be felt

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By imposing taxes on an additional $200 billion in Chinese goods, President Donald Trump has intensified a battle of wills between the world's two largest economies and the outcome is far from certain.

No one knows how long the tariffs announced Monday might last. No one knows if Beijing will yield as pressure builds or instead stiffen its resolve and keep retaliating. No one knows if a politically divided United States will serve to undercut Trump's aggressive tactics.

But what's clear is that the latest fight in the escalating trade war is likely, one way or another, to affect consumers, companies, markets, the economy and the political landscape.

And how all that plays out could determine whether Trump's negotiating gamble proves a triumph or a failure. Here is a look at 5 potential consequences:

Opinion | Lessons we must learn from the fixed-dose combinations fiasco

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The Union Ministry of Health has finally banned over 300 fixed-dose combinations (FDCs), which are two or more drugs combined in specific ratios. They have been ordered off the market as more than one set of experts — appointed by the government to study them — found that they had no therapeutic rationale to exist and could actually be risky to consume.

While FDCs per se are not bad, this ban is about the ones that lack scientific evidence to prove safety and efficacy. The growth of such 'irrational' FDCs in India is the outcome of a weak regulatory system unable to deal with the ill-effects of business opportunism.

The situation was in the making for years. A decade of multiple attempts by the central office of the Drugs Controller General of India (DCGI) to weed out irrational FDCs were either blocked by industry players in court or ignored by state drug regulators who share oversight of the drug industry with the Centre and approved several of these FDCs. An outmoded law and the central regulator's tardy and inconsistent approach did not help matters. Let me take these one at a time.

First, states liberally approved FDCs with scant evidence. A drug that is to be launched in the country for the first time secures the DCGI approval after providing the required safety and efficacy data. This first drug becomes a "reference" product and subsequent manufacturers of the drug have to demonstrate equivalence to this reference product for the DCGI approval.

However, once a drug has been on the market for four years, a company wanting to make such a product need only secure a manufacturing licence from a state food and drug administration. The states read this to mean that if each of the constituent drugs of an FDC had been approved by the DCGI, their combination was not "new". As a result, a plethora of FDCs, unsupported by sufficient evidence but licensed by states, flooded the Indian market. By the time the DCGI took note, the problem had gotten out of hand. When it tried reining the states in, it was initially rebuffed. Its demand for data found little traction.

Second, the law did not keep pace. Even as the market was seeing more of these launches, a framework to guide the approval of FDCs was absent. For instance, as scientific publication The Lancet reported in 2015, the DCGI had approved 41 combinations of the diabetes drug metformin with other drugs without publishing the justification for these approvals.

Third, pharma companies were known to use FDCs for business reasons. Initially, they were a means to escape price control (adding an ingredient to skirt price control norms) and later, a tool to differentiate in a market overrun with me-too drugs. For instance, by the late nineties it was clear that since India was a signatory to the intellectual property treaty of the World Trade Organization, India's companies could no longer make patented drugs by a different process after 2005.

The homegrown industry went overboard launching every pre-2005 drug it could find in order to beef up for the drought that would eventually come. In such a crowded market, FDCs helped gain doctor interest. The MNCs followed to beat them at their own game. And since there was no robust post-market surveillance/pharmacovigilance system in place, any adverse effects were probably never caught. So high were the stakes that in 2007, the DCGI had to suspend plans to ban hundreds of FDCs as the industry sued and obtained a stay.

This is not to state that companies didn't launch rational FDCs for patient benefit. They did. But even those that were being called into question in the scientific community and by the central regulator continued to be sold in India. Repeated calls for data to let them stay on market fell on deaf ears. Finally, in 2016, when the government ordered a sweeping ban on 344 FDCs after commissioning a study by experts, the industry objected in court on grounds of procedure. But when it came to data, they were unable to convince a different expert panel, this one directed to be set up by the Supreme Court, thus leading to the current ban.

Now, India does have a FDC-specific procedure, though only since 2011. States are being pressured to act. Earlier this year, Uttarakhand banned FDCs not approved by the Centre after joint raids on factories showed the extent of the problem. The industry has also begun phasing out such FDCs though the extent is not known.

No doubt, in the case of the 300-plus FDCs under review, the office of the DCGI has prevailed, but in the most inefficient way possible. It has let the problem get out of hand, then fought the industry in more than one court, constituted two different committees to weigh in on the issue and culminated with a relatively small, but valuable, number of drugs from its 2016 list still awaiting further study. In the interim, it has drawn global criticism for its lax attitude towards safety.

And the problem isn't over. It continues to pressure states to withdraw FDCs that it hasn't approved. The threat of lawsuits still looms; at the time of writing, a pharma company had reportedly petitioned the Delhi High Court against the ban on one of its brands. Given the lack of a rigorous track-and-trace system, it is also going to be challenging to ensure that the ban is enforced.

The lesson, therefore, to be learnt from the FDC fiasco is this: India needs a strengthened, co-ordinated drug regulatory system, a proactive regulator with teeth, an updated and robust law, and an industry that is made to feel the consequences of crossing it.

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