Raghuram Rajan, the new governor of RBI, believes that the economic mess that the country finds herself in is not structural and can be fixed in incremental steps
While admitting that the Indian economy has serious problems to overcome, Raghuram Rajan, the new governor of Reserve Bank of India (RBI) believes that the very problems that India finds herself in, namely the current account deficit and balance of payment crises are not structural in nature, and can be fixed by incremental reforms.
“For the most part, India’s current growth slowdown and its fiscal and current-account deficits are not structural problems. They can all be fixed by means of modest reforms,” wrote Rajan in Project Syndicate, an economic think-tank. He added, “Indeed, despite its shortcomings, India’s GDP will probably grow by 5%-5.5% this year – not great, but certainly not bad for what is likely to be a low point in economic performance.”
Rajan believes that the key to India’s recovery is to take incremental steps, not necessarily major structural reforms, like clearing projects, fixing subsidies and easing financing flows. “The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. Over the last year, the government has been pursuing this agenda, which is already showing some early results. For example, the external deficit is narrowing sharply on the back of higher exports and lower imports,” writes Rajan in Project Syndicate.
Why were most of the projects not cleared earlier? The main reason was the conservative mindset adopted by the Indian government amidst a series of scams and corruption charges. They put all the projects on hold. “India’s investigative agencies, judiciary, and press began examining allegations of large-scale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt,” Rajan explains.
Rajan believes that the Indian public are depressed and are often critical of the government, which have hampered the pace of reforms, though he feels that the government should have acted quicker. Rajan writes: “...while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.”
Due to paralysis and self-doubt, the current account deficit widened as government shut down mines and banned iron ore exports. Rajan states: “..as large mining projects stalled, India had to resort to higher imports of coal and scrap iron, while its exports of iron ore dwindled. An increase in gold imports placed further pressure on the current-account balance. Newly rich consumers in rural areas increasingly put their savings into gold, a familiar store of value, while wealthy urban consumers, worried about inflation, also turned to buying gold.”
In addition to corruption and decision paralysis by the government, Rajan traced India’s problems to the accommodative monetary policies (i.e. quantitative easing of US) of developed countries which were targeted at avoiding recession in the West. However, according to Rajan, the recession never happened while India continued to have high relative interest rates, which constrained credit to businesses and investment.
Quoting figures to state the case for India, Rajan said that most of the India’s macroeconomic numbers are far better than other emerging markets, and that the situation is not as bad as most people think. He writes, “India’s public finances are stronger than they are in most emerging-market countries, let alone emerging-market countries in crisis. India’s overall public debt/GDP ratio has been on a declining trend, from 73.2% in 2006-07 to 66% in 2012-13 (and the central government’s debt/GDP ratio is only 46%). Moreover, the debt is denominated in rupees and has an average maturity of more than nine years. India’s external debt burden is even more favorable, at only 21.2% of GDP (much of it owed by the private sector), while short-term external debt is only 5.2% of GDP. India’s foreign-exchange reserves stand at $278 billion (about 15% of GDP), enough to finance the entire current-account deficit for several years.”
He concludes with an optimistic tone: “India can do better – much better. The path to a more open, competitive, efficient and humane economy will surely be bumpy in the years to come. But, in the short term, there is much low-hanging fruit to be plucked. Stripping out both the euphoria and the despair from what is said about India – and from what we Indians say about ourselves – will probably bring us closer to the truth.”
While equity mutual fund sales continue to disappoint, redemptions fall to their lowest in 52 months, resulting in a net inflow
For just the third time in the past 12 months, equity mutual fund schemes reported a net inflow of assets. Both equity mutual fund sales and equity mutual fund redemptions have fallen to their lowest since April 2009. In that month, equity funds registered a net ouflow of Rs106 crore with sales of Rs1,994 crore and redemptions which amounted to Rs2,100 crore. In August 2013, sales which have averaged around Rs3,500 crore over the last twelve months fell to Rs2,784 crore and redemptions which averaged Rs5,000 crore declined by more than half to Rs2,326 crore. With the volatile market conditions of the last one month investors must have been confused whether it was a good time to buy or sell.
In the three months from May 2013 to July 2013 these was a decline of 11.70 lakh folios, averaging a reduction of nearly 4 lakh folios a month. In August 2013, in line with the lower redemptions, the number of folios declined by 0.63 lakh to 3.17 crore folios.
Moneylife has been continuously highlighting the decline in number of folios. This along with the continuous outflow of assets is a major concern for the industry.
Investments in equity linked savings schemes (ELSS) showed an improvement with sales in the first five months of the financial year amounting to a total of Rs683 crores compared to Rs662 crore seen in the same period last year. Other equity oriented schemes disappointed with total sales amounting to just Rs14,333 crore in the five month period compared to Rs14,940 crore seen last year.
This is despite the fact that the regulator has taken steps to improve penetration of mutual fund schemes beyond the top 15 cities and has even introduced a direct plan with a lower expense ratio for investors, who wish to skip the distributor and invest directly. While the direct plan is the preferred route for corporates investing in liquid mutual fund schemes, this route has failed to lure investors to put their money in equity schemes.
SEBI's measures come at a time when concerns are being raised about outflows of foreign capital and weakening of the rupee against the dollar and other foreign currencies
Market regulator Securities and Exchange Board of India (SEBI) will soon notify new rules to make it easier for foreign entities to invest in Indian markets. SEBI's move follows finalisation of the necessary regulatory changes by the union government for a major overhaul of the existing regulations for overseas investments.
Under the new rules, which are likely to be announced in the next few days, SEBI is creating a new class of investors — to be called foreign portfolio investors (FPIs) and would classify them in three categories in line with their risk profile.
The know your client (KYC) and other regulatory compliance requirements for the FPIs would depend on their risk category and the norms would be easier for lower-risk investors.
The proposals are based on the report of KM Chandrasekhar Committee and were approved by SEBI in its board meeting in June. Thereafter, the regulator referred the recommendations to the union government for implementation.
SEBI is merging different classes of investors such as foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFIs) into a new category FPIs, to put in place a simplified and uniform set of entry norms for them.
The FPIs would be categorised into three categories — low-risk (for multilateral agencies, Government and other sovereign entities), moderate risk (for banks, asset management companies, investment trusts, insurers, pension funds and university funds) and high-risk (all the FPIs not included in the first two categories).
The third-category of FPIs would not be allowed to issue participatory notes.
The KYC requirements would be the simplest for the first category and most stringent for the third class.
The submission of personal identification documents of the designated officials of the FPIs would also be done away with for the first two categories.
These measures come at a time when concerns are being raised about outflows of foreign capital and weakening of the rupee against the dollar and other foreign currencies.
The new norms are expected to make it much easier for foreign investors to enter the country and make investment decisions.
The regulator had earlier sought certain changes in the provisions of the Prevention of Money Laundering Act, as also in the norms for taxation responsibility under the FPI regime, to facilitate the framing of new norms.
According to the new regulations, any portfolio investments would be defined as investment by any single investor or investor group if they do not exceed 10% of the equity of an Indian company.
Besides, any investment beyond the threshold of 10% would be considered as foreign direct investment (FDI).