Author Archives: Sohrab Darabshaw

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Festival season in India normally means one thing: a rush to buy gold.

Outside of China, India sees the most amount of gold buying when Indians are, well, happy or enjoying a moment — be it a party, a wedding or a festival.

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But this festive season, starting from around the beginning of October, gold buying has not picked up at the pace one it used to.

Reports are coming in that Indians are not flocking to jewelry stores as they normally would for a couple of reasons – an increase in the price of domestic gold and the increasing value of the U.S. dollar versus the Indian rupee.

At the first marker of this season, that is Dusshera, when buying the yellow metal is considered auspicious, demand was down between 20-40% in some places, as compared to the same period last year, according to a Reuters report.

Of course, demand was better compared to some of the previous months, but it has not been as high as it was last year, according to Nitin Khandelwal, chairman of the All Indian Gems & Jewellery Domestic Council, as quoted by Reuters.

Much of the demand for “festival” gold comes from rural India. This year, that sector is lagging, partly because of failure of the monsoon in many parts. A good monsoon means a bumper crop, which translates into better buying of the bullion during the festival time. Even discounts of about U.S. $8 an ounce failed to pull in the crowds.

The next milestone is the Indian festival of lights, Diwali.

While some retail jewelers are optimistic of an increase in pickup, others are keeping their fingers crossed. The price of gold continues to soar, touching Rs 32, 350 (about U.S. $442) per 10 grams as of Oct. 23.

Gold plays a major role in the Indian economy. Previous studies have pegged India’s gold stock at around 24,000 tons, mostly held by the average Indian. Its value, at today’s rates, reaches about U.S. $800 billion.

The last quarter of the year is the season of peak demand, with Indians buying almost 240 metric tons on average in the past four years, according to the World Gold Council.

This year, Dhanteras — one of the most auspicious days for Indians to buy gold — falls on Nov. 5 and will be followed by Diwali.

Both retailers and bullion analysts say that if things on the ground do no improve by then, the trend seen during Dusshera will follow into Diwali.

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Gold futures at India’s Multi Commodity Exchange of India Ltd. are up by over 10% this year, the highest since July 2016.

The rupee, on the other hand, is at its lowest standing versus the dollar in 16 years. Ask any bullion dealer or retailer and the market rule of thumb is that rising prices always bring down sales.

Going by the way things are on the ground at the moment, chances of things changing dramatically for the better by the first fortnight of November seems like a far-off dream.

This story of India’s coal shortage refuses to die down.

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For some years now, many parts of the country have been facing power cuts. Why? Because of a shortage of coal, which becomes even more acute in the monsoon season (which is just about ending in most parts of India).

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Northern provinces, including the country’s capital, New Delhi, and those in the central part are susceptible to coal-linked power interruptions, forcing industries to halt temporarily and wreaking havoc on the lives of ordinary people.

India’s single-largest supplier of coal for thermal plants, the state-run Coal India, finds itself at the receiving end because of supply issues, which it, in turn, says is due to unavailability of rail wagons. The firm accounts for about 80% of coal production.

Not only are power plants complaining of the coal shortage — other industries are now protesting loudly, too.

The Aluminium Association of India (AAI), for example, dashed off a letter to the federal government asking it to halt prioritizing coal supply to power plants.

A report in the Indian newspaper The Hindu said excluding other important industries from the coal supply chain was having a detrimental and cascading effect. The reaction comes after the government asked coal companies to send off supply to thermal plants first.

As expected, in these troubled days of import-export between the U.S. and the rest of the world, India’s coal imports shot up by 35% to 21.1 million tons (MT) in September this year, compared to 15.61 million tons in same period last fiscal, according to the Economic Times. Imports were largely of non-coking coal.

Government officials had hoped that this monsoon season it would be a different story compared to some of the previous years. The federal government had assured all that this time there was enough dry coal supply for power plants. At the end of the rainy season, the government’s claim was shown to be untrue.

Incidentally, Coal India registered 15.2% growth in coal production during the first quarter ended June 2018, amounting to 136.87 MT.

One can even claim that an indirect victim of the ongoing U.S.-China trade tariff war is India’s aluminum sector.

Because of the tussle, both countries are sending their aluminum scrap to India. In the AAI’s letter, it pointed out that aluminum smelting needs uninterrupted electricity. An outage of over 2 hours directly affected the functioning of the smelters for a temporary period, affecting bottom lines and yielding lower output.

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Coal India had sent 84% of its coal to power plants up till Oct. 12, sending 1.34 MT of coal per day to power plants in October.

The Indian province of Goa, known world over for tourism, was once also a well-known destination on India’s mining map.

But legal, environmental and political issues ensured the stoppage of mining operations there in 2012.

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Though operations did resume to a degree in 2015, things have not picked back up speed to pre-2012 levels.

All that has now led Manohar Parrikar, Goa’s chief minister, to write to the Government of India (GoI), asking it to fast-track the complete resumption of mining in Goa.

The chief minister, in his letter to Indian Minister for Mines Narendra Singh Tomar, has said Goa’s mining sector needed an immediate “legislative cure,” according to a report in The Statesman.

What he has sought is an amendment of the Mines and Minerals (Development and Regulation) Act. This will mean that current lease holders can continue mining. It would also allow the postponement of auction of the iron ore leases.

The Indian government is perturbed by the slowing down of the overall mining sector in India.

For example, a recent report by the Centre for Monitoring Indian Economy (CMIE) pointed out that foreign direct investment (FDI) inflows had slowed down significantly, from U.S. $659 million in 2014-15 to about $36 million at the end of 2017-18. Mining’s overall contribution to FDI had declined from 2.06% to 0.08% in the same period.

For Goa, specifically, there were hopes expressed earlier that mining would resume full-scale by Oct. 1 this year, especially because even the province’s local government had unanimously passed a resolution a few months ago seeking the intervention of the Indian federal government. This resolution asked the government to suitably amend the local laws to allow mining leases to be operational till 2037, and also amend the central laws.

In 2015-16, for example, only 7 million tons of iron ore were exported, while the following year it rose to 20 MTA, the ceiling set by the Supreme Court of India.

But the local government’s decision to fast track the renewal of leases without following basic laid down rules led to mining coming to a complete halt from March 2018.

One of the affected mining companies is the Anil Agarwal-owned Vedanta Group. To express support for the chief minister’s demand, Agarwal recently tweeted “concern” over the imports of natural resources, and suggested that iron ore mining in Goa be restarted.

In his tweet, the executive chairman said iron ore exports worth billions from Goa had stopped, all of which had contributed to the value erosion of the Indian rupee versus the U.S. dollar.

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In a tweet, which tagged Prime Minister Narendra Modi, Agarwal added there was an urgent need to resume mining in Goa.

By now, much has been written on U.S. trade tariffs, the latest being the 10% tariff on Chinese imports amounting to a value of $200 billion. While almost all the countries against whom the U.S. has imposed tariffs have chosen to retaliate and go in for a tit-for-tat policy, India, curiously, has decided to be cautious.

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MetalMiner has followed this story over the last few months. As late as August, we reported that for the second time, India deferred imposing a tit-for-tat duty on the import of over two dozen products from India, including certain flat-rolled stainless steel products. It was supposed to come into effect Aug. 8, but now the new date is Sept. 18.

Sept 18’s come & gone, and it is now being reported that the Indian government has postponed its decision yet again.

A report by Live Mint said India would not be imposing a “revenge tax” against 29 American products worth U.S. $235 million to oppose the move by the U.S. to raise import duties on Indian steel and aluminum.

The Live Mint report quoted a “person with knowledge of the development” as saying the two nations were engaged in arriving at a negotiated solution on the issue.

So when’s the next date? Nov. 3.

It was on June 20 that India had said it would raise tariffs on the U.S. products, including fruits worth $10.6 billion imports in retaliation.

So why is India dithering?

Political observers cite many reasons for India’s reluctance. One is that India is headed for a general election soon and the government does not want Indo-U.S. ties to deteriorate because it could then become a poll issue, giving the opposition a handy weapon.

The other could be that both countries were engaged in what’s known as the “2+2”  negotiations on many fronts, such as defense, so neither wants to ratchet up the heat. Also, U.S. President Donald Trump’s friendly relationship with his Indian Prime Minister Narendra Modi is well-known.

India has been demanding a waiver on tariff hikes similar to the ones the U.S. granted to Argentina, Brazil and South Korea. There were some unconfirmed reports here that the Trump administration had hinted that it was willing to waive off the tariff hikes on steel and aluminum if India were to cap the exports at 70% of its total exports to the U.S. last year. India, though, does not seem to be keen on doing this, though there’s no official word on it.

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India’s exports of steel items to the U.S. went down by 42% in the quarter ending June, mostly because of the sanctions.

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Moody’s Investors Service has said India will be the brightest spot for the steel sector over the next 12-18 months, according to a report by the Hindu Business Line.

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Moody’s pointed out that India’s steel consumption was rising at least 5.5%-6% every year, tracking strong GDP growth of 7.3%-7.5%.

It said rated Indian steel producers had only marginal exposure to the U.S. Moody’s has estimated that their indirect exposure may also be limited, given most of their sales were to domestic automotive and manufacturing companies.

In fact, on Tuesday the Indian Steel Ministry, perhaps buoyed by sentiments such as those expressed by Moody’s, issued a statement saying it was hopeful of occupying the second slot in global steel output (after China), while the government has also taken steps to encourage secondary steel producers to boost performance.

According to Moody’s, with minimal new steel capacity expected to be commissioned until 2021 in India, robust steel demand — especially from the construction, infrastructure and automotive sectors — would keep end-product prices high, even as rising costs for key inputs, like coking coal and iron ore, put pressure on profitability.

Moody’s also noted the outlook for the Asian steel industry was stable, reflecting the consideration that the profitability of rated producers will increase moderately over the next 12 months against the backdrop of overall steady regional demand.

The robust steel demand, especially from the domestic construction, infrastructure and automotive sectors would keep end-product prices high, even as rising costs for key inputs, coking coal and iron ore pressure profitability.

The Indian Government believes that, in conjunction with the primary steel sector, the secondary steel sector holds enormous potential for growth and opportunities.

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“Strong performance of the secondary steel sector has added muscle to India’s steel production. Encouraged by the overall potential, the Government of India has taken various initiatives to improve the performance of this sector. Based on the present growth pattern, it is expected that India will rise to the second position after China,” the statement said.

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Rare earth exporters in India have lodged protests after the government snatched their rights to send these precious elements abroad.

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Rare-earth metals are a group of 17 elements, which are found in geological deposits. Some of the most abundant metals in the world are neodymium, cerium, and lanthanum.

All rare earths are classified into two groups: light rare earths (LREs), and heavy rare earths (HREs).

Just 20 years earlier, the Government of India (GoI) allowed the private sector into beach sand mining. Now, it issued a notification, wherein the right to export these rare-earth metals have been taken away.

Instead, the GoI has introduced a canalization system.

The primary aim of canalization of exports through Indian Rare Earths (IRE), according to the Financial Express, is to curtail direct private sector export of beach sand minerals and derivatives like ilmenite, rutile and zircon.

Canalizing means putting quantitative restrictions on exports.

But the move has obviously not gone down well with rare earths miners. Miners have said these checks would curtail beach sand mining activities and deprive India of a developing sector.

According to a new research report by Global Market Insights, Inc, the rare earths market size will exceed U.S. $20 billion by 2024. It’s well known that the majority of the global rare earth production capacity is in China. However, China has not shown much inclination of sharing those resources with other nations.

Thus, the focus is on countries like India and Japan — specifically India, which has a sizable reserve.

Driving this sector is the demand for magnets in automobiles, and requirements in defense and energy generation. Electric cars, for example, rely on some of rare-earth metals.

Beach sand minerals and their derivatives find diverse applications in paints and other decorative materials, papers and plastics, and high-tech applications. At present, much of India’s share of domestic production, as well as exports, are done by private sector firms.

The GoI notification said export of beach sand minerals had been brought under the STE and shall be canalized through IRE. Beach sand minerals, permitted anywhere in the export policy, will now be regulated in terms of the new policy. One of the other sources of angst for private firms in the business is that they have already made huge capital investments by way of technology and production facilities.

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According to the Financial Express report, beach sand minerals mining activity commenced in India in 1908. In addition, until 1998, other minerals were restricted only to public sector companies (except for garnet), but just after that the GoI embarked on a path of liberalization that allowed participation by the private sector.

The Anil Agarwal-led Vedanta Ltd. may have faced a blow when one of its operations in India was shut down earlier this year, but that is not stopping it from investing more money in the country.

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Navin Agarwal, chairman of the company, has said they are planning invest as much as about $8 billion (Rs 56,000 crore) to expand its oil and energy businesses in India.

“As India’s largest private sector oil producer, Vedanta Limited contributes 27% to the domestic production and aspires to take it up to 50%,” he was quoted as saying.

About U.S. $4 billion will come in within the next two to three years in various growth projects. The remaining will be in zinc, lead, silver and aluminum businesses.

Of these earmarked funds, Vedanta said it will be investing $2.3 billion towards capex on its oil and gas activities in the “near term” to increase the reserve base by around 375 million barrels. According to its latest annual report, Vedanta aims to increase production from the current 200,000 barrels per day (bpd) to 300,000 bpd over the next few years.

“Our rich project portfolio is comprised of enhanced oil recovery projects, tight oil and gas projects and exploration prospects. As well as boosting production, this investment will generate sustainable employment opportunities, directly and indirectly and bring cutting edge solutions to community needs,” Vedanta stated.

For FY 2019, Vedanta expects to achieve growth in production, with total volumes in the range of 220-250 bpd, through execution of growth projects with operating expenditure of sub-$7/boe (barrel of equivalent).

This year, Vedanta has posted record zinc and lead production. In May, Vedanta had said it had received an order from the Tamil Nadu provincial government to close the company’s 4 lakh ton per annum copper smelter plant in Tuticorin with immediate effect. At least 13 people were killed after local police opened fire on people protesting against the plant’s operations.

Vedanta has always supported its Tuticorin operations, emphasizing the copper smelter complied with all environmental norms and is amongst the best, globally.

Vedanta has often advocated for policy change on the mineral mining front in India. The chairman reiterated this, saying encouragement to explore and produce natural resources in India would lead to greater self-reliance and save billions of dollars in imports.

But in what is seen as a further blow to the company’s operations in India, the Goa Directorate of Mines and Geology (DMG) has issued an approximately U.S. $13 million (Rs 97.48-crore) demand notice to Vedanta towards non-payment of royalty for FY 2011-2013.

The company is alleged to have illegally mined iron ore to the tune of 20,76,746 tons during this period, according to the DMG, a charge hotly denied by Vedanta.

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The principal royalty amount is about U.S. $7.6 million (Rs 54.48 crore), while the interest of about U.S. $6 million (Rs 43.03 crore) has to be paid up in the next seven days.

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When it comes to coal, India’s litany of woes continues.

Despite high prices in international markets, imports continue to rise — and there’s no letting up on that front.

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After a dip in FY 2017, overall coal imports increased 10% in FY 2018. What’s more, the situation is so bad that India’s largest power producer, the National Therma Power Corporation (NTPC), is running short on supply and has sought bids to import coal.

NTPC Ltd. is seeking 2.5 million metric tons (MT) of imported coal, according to two separate tenders on its website. The last time it sought foreign coal was in 2014.

One of many reasons for the shortage is that India’s largest coal producer, Coal India Ltd. (CIL), which produces more than 80% of India’s coal, continues to fall short in production and just cannot keep up with the rising demand, driven largely by higher electricity generation.

But if you were to ask CIL, it would in turn blame India’s congested railway network and a shortage of railway carriers to ship the coal to its customers; this, they argue, has forced consumers from power plants to aluminum smelters to purchase the fuel from overseas.

Rating agency CRISIL said here in a report that the power sector imports in India were projected to cross 75 MT by FY 2023, most of it driven by demand from imported coal-based plants. This comes even as non-power sector imports are expected to decline to 70 MT due to “improvement in domestic supply post linkage auctions and development of key captive blocks allocated to the non-regulated sector,” according to the CRISIL report.

But a report by news agency Reuters had an even more interesting explanation for the continued shortage.

It cites Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis (IEEFA), as saying that a large part of India’s coal imports was used by consumers other than on-grid power plants. Buckley pointed out to Reuters that there were about 30 gigawatts (GW) of coal-fired generation capacity that was used by captive power plants.

They included aluminum smelters, cement makers and other industrial users, more reliant on coal imports as their demand wasn’t prioritized by Coal India; meaning, these folks were last in the queue.

According to Buckley’s calculation, if this 30 GW was run at 61% capacity, it would need about 96 MT per annum, which represents about two-thirds of current thermal coal imports. So, captive power plants had to resort to imports when Coal India couldn’t meet their needs.

However, the shortages are not limited to just power stations. Coking coal, used in steelmaking, has also seen a sharp surge.

Left with little choice for now, the Indian government has directed CIL to raise daily output and sales to 2 MT from 1.4 MT achieved in the last quarter.

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The coal ministry told Coal India that it must produce and sell 1.9 MT and 1.94 MT, respectively, throughout the year. In the June quarter, CIL managed daily production and sales of 1.4 MT and 1.61 MT, respectively.

India’s aluminum sector finds itself in a state of flux.

Secondary aluminum makers in India are not upset by the import levies announced by U.S. President Donald Trump, but have expressed concern at the inverted duty structure perpetuated by the Indian government itself.

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On the other hand, India’s largest aluminum producer wants the government to cap the quantity of imports of low-cost semis, wire rods and scrap from China and the U.S., as the percentage of inbound shipments in domestic demand is steadily going up.

As has always been the case, the primary and secondary producers are once again at loggerheads.

In all this, the sector, which is not yet on the core sectors list, has demanded a new policy itself, which the government says it is contemplating.

The Metal Recycling Association of India (MRAI), a representative body of the secondary aluminum producers, recently issued a statement urging the government to bring basic customs duty on imports of aluminum scrap to zero from 2.5%. This was in response to a move by the Aluminium Association of India (AAI), which wants the duty to be raised to 10%. MRAI feels the move of a hike will take away jobs of thousands of people working in the downstream & ancillary industry, (MRAI) said in a statement.

Ongoing exports of primary aluminum have upset the secondary producers more than the Trump tax. This lot claims the skewed duty structure has squeezed capacity utilization and affected margins.

In all this, the largest producer of aluminum, Hindalco, has asked the government to impose quantitative restrictions on imports in the near term.

A Bloomberg Quint report quoted Satish Pai, managing director and CEO, as saying the government should move to duty safeguards eventually, adding that while quantitative restrictions will be helpful in the short term and are allowed under the World Trade Organization regime, safeguards will take at least six months.

Hindalco has asked the government to limit imports based on the average of the last three years of imported quantity.

In this kind of tax regimes, India’s aluminum industry is barely remaining competitive because it has the highest production costs for aluminum among the largest producers (including Canada, Russia, the Middle East and China). Other hurdles include high power costs, which drove smelter metal’s cost 73% higher in the last 15 years compared with a 64% rise in the price of aluminum on the London Metal Exchange.

As India strives to meet its economic growth targets, aluminum is becoming increasingly critical for its infrastructural needs. In India, aluminum consumption is pegged at 2.5 kg per capita. To reach the global average of 11 kg per capita, India must up annual consumption by 16 million tons.

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Experts in India are calling for the government to formulate a National Aluminium Policy (NAP) focusing on holistic short- and long-term visions, identifying growth targets for demand augmentation and capacity addition.

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India’s trade tiff with the United States has all the hallmarks of a potential political battle — for India, at least. With general elections not too far away, it looks like Narendra Modi’s government does not want to really stir the pot, lest there is some fallout in the domestic political scene.

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That could be one of the reasons why the Indian government has chosen to defer a tit-for-tat duty on the import of over two dozen products from India, including certain flat-rolled stainless steel products. It was supposed to come into effect Aug. 8, but now the new date is Sept. 18.

Trade between India and the U.S. has been buffeted by many problems in the past few years. The hike in import duties on Indian goods coming into the U.S. a few months ago was one more such hiccup.

But the ruling dispensation here does not seem to want to take any chances. So, in a renewed effort to resolve the differences between the two countries, India’s Commerce Ministry has requested the Finance Ministry to extend the implementation of higher duties by 45 days.

The Trump administration had decided to hike the import duties on certain steel and aluminum products, not only from India but other countries, such as China, too.

Though the U.S. Trade Representative’s office had two rounds of dialogue with Indian officials, a settlement was not reached. Now, by deferring the retaliatory hike, the Indian government is hoping the issue can be resolved in the next 45 days.

On India’s list of increased duties are 29 products, which include walnuts, almonds, pulses, apples and non-iron.

Duty on flat-rolled iron products has been raised to 27.50% from 15%, while certain flat-rolled stainless steel products will now attract 22.50% duty (compared with the earlier 15%).

Besides the domestic political fallout, the Indian government may also be a bit apprehensive of the White House’s response and the potential for further targeted actions.

India is not really on the same plane as China vis-à-vis such import tariffs; Washington looks at New Delhi very differently than it does Beijing. For one, unlike China, India is not a major exporter of steel and aluminum to the U.S. In 2017, the U.S. accounted for about 2% of India’s steel exports.

Things between India and the U.S. are proceeding at a different level, evident from the fact that last week the U.S. Department of Commerce granted New Delhi a special status that gives the emerging market an automatic waiver for exports of certain military and dual-use technologies (much to the consternation of the Chinese). That could be another reason why the Indians have decided to hold off on enacting the retaliatory duties.

Steel Supplies Dumped in India

Meanwhile, some Indian newspaper reports have said following the duty hike, some countries like China and South Korea have stepped up the dumping of steel in India.

They are said to be diverting supplies from the U.S. and the European Union in massive volumes to beat the impact of a global tariff war. Quoting official data, the report said it suggested steel supplies from China, the world’s largest steel producer, surged to 362,000 tons in the April-June period, up 67% sequentially from the 217,000 tons in the previous quarter.

As Japan and Korea enjoy duty relief under their respective free-trade agreements with India, the imports from these countries are 10% cheaper than domestic steel.

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Importantly, while the combined steel exports by China, Japan and South Korea to the U.S. dropped 17%, or by 241,000 tons, in the April-June period vis-à-vis the previous quarter, their supplies to India rose by 459,000 tons, up 45% from the March quarter. This, said the report, clearly showed that Asian steelmakers were rerouting supplies, meant for the US and other nations, to India.