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