Economy
UPA govt’s FDI liberalisation move: Too little, too late
While the UPA government is trying to put up a brave show on the FDI front, the bottom-line of India Inc shows a pathetic picture. The current economic situation is so bad that there is not even an elbow room for the RBI to cut interest rates and for the government to embark on large-scale policy stimulus
 
Worried over the falling rupee, capital outflows and the sagging morale of foreign institutional investors (FIIs), the Manmohan Singh-led United Progressive Alliance (UPA) government has announced liberalization of foreign direct investment (FDI) caps in 13 sectors. In addition to hiking FDI limits in some sectors, the government has changed the FDI route to the automatic route. This means only a notification to the Reserve Bank of India (RBI) is required for the FDI as against the earlier route of requiring approval from the Foreign Investment Promotion Board (FIPB). For eight of the 13 sectors, the government has changed the FDI route to automatic, and for four sectors, it has liberalised the cap.
 
The latest announcement on increasing FDI in insurance is nothing but a reiteration of an earlier move. Last year the Cabinet approved hiking FDI limit in insurance to 49% but the proposal is still awaiting Parliament’s nod.
 
According to Morgan Stanley, liberalization of FDI caps is another small measure by the government to support the investment sentiment for investors. “With high current account deficit-CAD (4.8% of GDP in FY2013) and real short-term interest rates (on CPI) close to zero, the currency has been under severe pressure since the US Fed relayed its decision to taper quantitative easing in the second half of the calendar year," it said.
 
Nomura Research, on the other hand feels that these measures, apart from boosting near-term sentiment, are medium-term positive as they will help attract stable long-term capital inflows. “However, we doubt there will be any significant impact on flows this year,” Nomura said.
 
In the last two fiscals, contrary to the economic theory, despite rupee depreciation, India's exports have suffered because of the lack of global demand and a virtual halt of iron ore exports. Simultaneously, the import of coal, crude oil and gold has increased. While some of these shocks are exogenous to India, domestic issues have also aggravated the currency depreciation.
 
While the UPA government is trying to put up a brave show on the FDI front, the bottomline of India Inc shows a pathetic picture. India Ratings & Research (Ind-Ra) said it believes the current business environment is more challenging and stressful than the conditions in 2001-2003 and second half of FY2009. The current economic situation provides limited elbow room to the RBI to cut interest rates and for the UPA government to embark on large-scale policy stimulus. 
 
According to Ind-Ra credit metrics of BSE 500 corporates, excluding banking and financial services, have deteriorated to their lowest since FY2008. This is attributed to a steady rise is debt levels without a commensurate increase in cash margins. “Given the mounting economic stress, the credit metrics of such corporates are unlikely to show a significant improvement in FY14. With external liquidity likely to remain tight, corporates have to depend upon the strength of their own balance sheet as well as on their ability to generate free cash flows and maintain a liquidity cushion,” the ratings agency said.
 
Here are the measures announced by the Manmohan Singh government and its likely impact...
 
1. Allowing 100% foreign direct investment (FDI) in telecom from 75% currently
- The telecom sector is in doldrums. Several new entrants left the race due to dwindling finances and legal hurdles. Almost all brokerages are cautious on telecom given weakening growth outlook, regulatory uncertainty, sharp depreciation of rupee and entry of a new, powerful entrant—Reliance Industries (RIL). In this scenario, it would be difficult for new foreign investors in pour money in the telecom sector. It may help incumbents like Vodafone to get additional capital, though. The FDI inflow in the telecom sector would depend more on the regulatory environment than the change in the FDI route.
 
2. Increasing the cap on FDI in the defence sector to 49%, with approval from the Cabinet Committee on Security from 26% (via FIPB)
- When domestic manufacturers are finding it difficult to get clearances from the defence ministry, FIIs stand a miniscule chance to pass the litmus test of Cabinet Committee on Security 
 
3. FDI cap for power exchange was retained at 49% but brought under the automatic route
- This would help reduce the time for approval.
 
4. FDI (up to 49%) in petro refineries, stock exchanges and insurance to be through the automatic route
- This would help reduce the time for approval. Insurance will have to wait.
 
5. FDI cap for asset reconstruction companies raised to 100%, and through FIPB route beyond 49%
- This would help reduce the time for approval.
 
6. FDI in tea sector beyond 49% through FIPB route while the clause about divesting 26% to an Indian company in the first five years has been deleted
- A fragmented sector. No major inflows expected. Perhaps designed to help specific businessmen.
 
7. FDI in single brand up to 49% through the automatic route, beyond that through FIPB
- Retail sector is also laden with uncertain regulatory environment. However, the increase in FDI in single brand should see some new players entering the ever-lucrative Indian market 
 
8. FDI for credit information companies hiked to 74% from 49%, and in courier services 100% FDI limit will be allowed under the automatic route
- This can attract only small amounts of money  
 

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COMMENTS

nagesh kini

4 years ago

Extremely well put across very rightly -
too little, too late in time.
it tantamounts to locking the stable after the horse has bolted.
While FDI is one matter, FIBP and other procedures are time consuming - Bloomberg's list of the top 20 new investment destinations are now Nambia and Zambia! Not India!
It is well known that the so-called FII money is nothing but Indian black money stashed abroad legitimized via circuitous devious routes.

HDFC Bank Q1 net up 30% at Rs1,844 crore
As of 30 June 2013, HDFC Bank's portfolio quality remained healthy, with gross non-performing assets (NPAs) at 1% of gross advances and net non-performing assets at 0.3% of net advances
 
Private sector lender HDFC Bank on Wednesday reported 30% growth in net profit at Rs1,843.86 crore for the quarter ended June 2013.
 
The bank had earned net profit of Rs1,417.39 crore in the April-June quarter of the 2012-13, HDFC Bank informed the exchanges.
 
The total income of the bank rose to Rs11,588.56 crore in the April-June quarter, from Rs9,536.9 crore in the same period last year.
 
The net interest margin for the bank was 4.6% as compared to 4.3% in the same period of the previous year.
 
As of 30 June 2013, HDFC Bank's portfolio quality remained healthy, with gross non-performing assets (NPAs) at 1% of gross advances and net non-performing assets at 0.3% of net advances.
 
The bank's Capital Adequacy Ratio (CAR) as of 30th June stood at 15.5%.
 
Shares of HDFC Bank closed at Rs 662.25 apiece on the BSE, down 2.36% from their previous close.
 

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Could the RBI have waited till Ben Bernanke’s testimony?
Did the RBI jump the gun with its tightening measure announced on Monday night or could it have waited for Ben Bernanke do its job?
 
In trying to deal with a crashing rupee caused by poor economic efficiency of the United Progressive Alliance (UPA) government led by Dr Manmohan Singh, a trained economist, the Reserve Bank of India (RBI) was forced to squeeze liquidity. But could it have waited and let Ben Bernanke, chairman of US Federal Reserve (Fed) do its work for it.
 
According to Richard Iley, chief economist for Asia at BNP Paribas, the timing of RBI's move is somewhat perplexing. “With Federal Open Market Committee (FOMC), members, not least chairman Ben Bernanke, moving to assuage market concerns over a premature tightening of policy, global risk appetite and emerging markets (EM) currencies had been showing greater signs of stability over the last week or so. Bernanke's testimony to Congress tonight is further expected to signal to markets that ‘tapering’ is likely to be delayed until the end of the year and that third round of quantitative easing or (QE3), in admittedly attenuated form, could yet extend deep into 2014. In this sense, RBI could have probably waited and let Bernanke do its work for it," he said in a research note.
 
In an unexpected development, the RBI on 15th July announced a series of measures designed to tighten dramatically inter-bank liquidity and so decisively break expectations of rupee depreciation. The RBI said it will limit from Wednesday the amount of liquidity available at the repo rate (liquidity adjustment facility or LAF) limited to Rs75,000 crore from the current limit of Rs90,000 crore. The central bank has also raised the rates at which additional liquidity (beyond the LAF) will be provided. This marginal standing facility-MSF and bank rates are raised to 300 basis points (bps) from 100 bps above the repo rate (to 10.25% from 8.25%). Further, the RBI said it will also conduct open market sales (OMS) of government securities worth Rs12,000 crore on 18th July which will further drain liquidity from the system.
 
BNP Paribas said, while these measures stop short of a formal policy tightening (like a rise in the repo rate or an even a cash reserve requirement hike) they nonetheless represent a substantial policy U-turn given that the RBI had been progressively trimming the repo rate in the face of weak economic growth and rapidly subsiding inflationary pressure at least at the WPI level. RBI's quantitative tightening is therefore designed to staunch the rupee's rapid depreciation that expectations of an earlier-than-expected from QE3 by the US Fed have sparked, the report added.
 
India has suffered combined net FII outflows of just over $9 billion since Bernanke spooked markets on 22nd May. While FII debt flows have been a key driver of capital flow volatility this year, portfolio flows are dominated by equities, which typically account for some 80% of portfolio inflows. Even after the outflows seen since late May, a cumulative net $12.6 billion has flowed into Indian equities this year, presumably chasing India’s long-run growth prospects.
 
While the entire EM complex has suffered outflows, the rupee has been one of the hardest hit currencies, tumbling to an all-time low against the US dollar of 61.21 on 8th July. By squeezing domestic liquidity and pushing up domestic money market rates, RBI is clearly attempting to rupture expectations of continued sharp rupee depreciation, enhance the rupee’s ‘carry’ appeal, reduce US dollar liquidity and stabilise FII debt flows, BNP Paribas said. 
 
According to Iley, while these measures certainly produced a firmer rupee in the immediate aftermath of their announcement with the rupee appreciating by about 1%, RBI has in effect taken a risky gamble. 
 
“As markets reassess the Fed’s reaction function, the worst of the pressure on the rupee is likely to abate. Combined with poor growth prospects not to mention the exigencies of India’s political cycle, this week's measures are likely to prove temporary (one-three months) and we would expect RBI to resume its easing cycle from Q4 onwards,” the chief economist of BNP Paribas for Asia added. 
 

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COMMENTS

Nilesh KAMERKAR

4 years ago

The current situation is the result of protracted misrule & mass scale loot & corruption . . .
RBI has now become 'bali ka bakra'.

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