Starting this story, quoting urdu poetry’s, greatest exponent, who so profoundly underscored the sentiment of a skeptic about a mirage and a reality; and trying to reflect on the policy and regulatory level shifts, which the government has ushered in the last 10-12 months to breathe life into a depressed and dying economy. The measures taken by the government in the last 2-3 months, at last and almost at the fag end of its second term, seem to undo its image of a government marred by policy paralysis. As the intent to do something, truly positive to negotiate the economic quagmire that it has slowly but surely created for itself, is clearly visible. But, the big question still lurks: Will the measures work? And in the circumstances when major legislations are stuck in Parliament, lines from Mirza Ghalib’s couplet comes back to haunt us that “…Humko Maloom hai Jannat ki Haqiqat Lekin; Dil ke Khush Rakhne ko ‘Ghalib’ Yeh Khayal Achcha Hai”.
In his Budget speech for 2013-14, Finance Minister P. Chidambaram detailed the economic challenges facing the nation even though he remained positive about the potential of reaching the 8% per annum growth rate.
He had said: “At present, the economic space is constrained because of a high fiscal deficit; reliance on foreign inflows to finance the current account deficit; lower savings and lower investment; a tight monetary policy to contain inflation; and strong external headwinds.” On the limited options before him to control current account deficit, he had added: “There are only three ways before us: FDI, FII or External Commercial Borrowing (ECB). That is why I have been at pains to state over and over again that India, at the present juncture, does not have the choice between welcoming and spurning foreign investment. If I may be frank, foreign investment is an imperative. What we can do is to encourage foreign investment that is consistent with our economic objectives.”
Almost all important indicators of the health of the economy have slowly started reaching the danger mark, setting the government into frenzy to revive the fortunes of the economy. As per Moody’s Analytics “…The slowdown that began with a downturn in fixed investment and manufacturing will soon spread to services and the rest of the economy in the second half of 2013. Little appears likely to improve the tepid pace of fixed investment growth.” On the other hand, the Asian Development Bank, in its report ‘Asian Development Outlook Supplement’, has brought down the growth forecast to 5.8 per cent instead of previous forecast of 6.0 per cent. The reasons ascribed for revised forecast are slow investment, weak industrial activity and slow progress on reforms. The report further states that the “growth remains constrained by supplyside bottlenecks, as reflected in the continued slowdown in fixed capital formation, weakness in the industrial sector, and sluggish progress in pushing through badly needed structural reforms.”
According to the Associated Chamber of Commerce and Industry of India (Assocham), 697 investment proposals worth Rs 1.4 lakh crore were received during 2012-13 as compared to 2,828 investment proposals worth Rs 6 lakh crore during 2011-12 by foreign and domestic investors. Assocham President Rajkumar Dhoot highlighted the importance of investments: “Investments are of grave significance as they drive up GDP growth, slow down the rate of inflation and create jobs.”
According to Prime Minister Manmohan Singh, the 6.5 % growth target “looks difficult” as industrial growth has fallen but has hoped that good monsoon would boost agricultural growth. Admitting that the economy was going through a ‘difficult period’, the PM had assured that steps were being taken to boost investment and control current account deficit.
Simply put, the current account deficit, fiscal deficit and inflation, when high require a constant supply of dollars. Pankaj Pandey, the head of research at ICICI Securities, was reported saying that 1% rupee fall adds 20-25 basis points to wholesale price inflation or WPI. But with the rupee trading around 60 to a dollar, Foreign Institutional Investors (FIIs) withdrew $1.8 billion from equity markets in June, while debt markets witnessed outflows of $5.4 billion. Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India), a foreign exchange brokerage, told Business Today that value of rupee depends on imports and exports, inflation, employment, interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange reserves, macroeconomic policies, foreign investment inflows, banking capital, commodity prices etc.
As per The Financial Express, growth in eight infrastructure industries plunged to 0.1 per cent in June mainly due to contraction in crude oil, natural gas, coal and electricity output. The eight core industries had expanded at a rate of 7.9 per cent in the same period last year. The contraction in production of coal, crude oil, natural gas and electricity in the month was 3 per cent, 0.6 per cent, 16.7 per cent and 1.2 per cent respectively, according to the government data. The eight infrastructure industries have a weight of about 38 per cent in the overall industrial production.
Since last year, industrial investment has faced challenges in the name of unnecessary delays, policy paralysis and logjam in matters of decision-making. South Korea based Posco, one of world’s largest steel manufacturer and the largest FDI investor in the country, faced delays in receiving iron ore mining rights and acquiring land following which it decided to withdraw from Karnataka with which it had agreed to establish a steel plant capable of producing 6 million tonnes of steel annually at the proposed investment of $5.3 billion. Furthermore, ArcelorMittal, the world’s largest steelmaker, also decided to scrap its planned 12-million-tonne steel project in Odisha, citing “significant external delays” in acquiring land and ensuring captive supply of iron ore. Warren Buffett’s Berkshire Hathaway also gave up on India’s insurance market.
Alterations were made in several sectors including petroleum and natural gas, commodity exchanges, power exchanges and stock exchanges. Further the limit for FDI in asset reconstruction companies was lowered from 100% from 74% and in credit information companies raised from 49% to 74%. Though the relaxed conditions have not yet been notified but as per reports, the Union Cabinet in accordance with the Mayaram Committee recommendations, has raised FDI caps in 13 sectors, most notably in the telecom and defence, and has proposed to increase FDI in insurance to 49% from 26%. Besides, rules related to multi-brand retail have also been relaxed. As ‘50% of the investment back-end only’ will now apply to minimum foreign investment limit of $100 million, and not the total investment. The requirement that 30% of the supplies will have to be sourced from smaller companies (reckoned by their investment into plant and machinery) has been raised from $1 million to $2 million, besides agricultural cooperatives and farmers’ cooperatives will also be considered in this category. The clause that foreign supermarkets can only open stores in cities with minimum population of one million has also been removed. States now have the freedom to identify even smaller cities where they may wish to allow such stores. It has also allowed FDI through the automatic route.
The Reserve Bank of India, in its various measures to contain the slide in the rupee, has made it mandatory for foreign institutional investors to obtain consent of holders of participatory note (P-Note) and derivative instruments before hedging. Now the FIIs must have a mandate from the PNote or Offshore Derivative Instrument holder for the purpose (of hedging), as per its notification.
Hedge funds and other Alternative Investment Funds which use complex trading strategies, leveraging investments for higher returns or borrowings, have been mandated to have a comprehensive risk management framework and a strong compliance function as per their size, complexity and risk profile. They have also been asked to maintain appropriate records of their trades and provide full disclosure of their trade management practises and any conflict of interest to SEBI.
To counter extreme volatility in USD-INR exchange rate, SEBI, in consultation with RBI, has tightened the exposure norms for currency derivatives to check large-scale speculations in the market. As per the new norms, brokers and their clients can now take reduced exposure on currency derivatives and also double their margins on dollar-rupee contracts. The exposure to all currency contracts for a broker has been capped at 15 per cent of their overall exposure or $50 million, whichever is lower. For clients, this cap would be 6 per cent, or $10 million, whichever is lower.
Growth or decline of an economy depends on a set of factors which need to be addressed correctly. The Indian economy was successful in weathering the global economic recession which had started with sub-prime crisis in the US in 2007. If it has been failed by anyone, then it is the government which was slowly unable to handle the political and economic situation, leading to lack of decision-making in key areas. The real culprit has been the government’s policy paralysis that has led to delayed project implementation, shortage of fuel, and high interest costs.
“Look at our Foreign Direct Investment (FDI) policy. Ministers go all out to woo investors, but when investment proposals come, we cannot take decisions,” said Deepak Parekh recently, while addressing a conclave. He found the situation akin to “inviting guests over to our house, but not opening the door”. Amongst other measures, he highlighted the need to urgently weed out “vested interests” stalling the implementation of various economic reform measures. “Over 116 legislations are pending for clearance in Parliament. Consensus on any key policy issue continues to remain elusive… clearly vested interests have to be weeded out,” he had said.
In his article in the Mint, titled ‘Why Warren Buffett, Posco are giving up on India?’, William Pesek crystallized the mood of the foreign investors in India. He outlined the factors for such a sorry state of affairs by stating:
“India has fallen into a self-destructive pattern of relenting on the big issues, then killing would-be investors with the details. Take the experience of furniture retailer Ikea of Sweden, which in January won approval to open outlets in India. Not content with the Swedish icon investing about $2 billion, the government played hardball. It tried to bar Ikea from selling food in its stores; Ikea stood its ground. But the damage was done.
“Executives fully expect to have to navigate India’s notoriously bad infrastructure, rigid and often unskilled labour markets, red tape and official corruption. They’re less keen on tripping over the fine print of vaguely written laws and local power brokers with agendas at odds with New Delhi.”
Unless the concerns raised by experts like Mr. Parekh and Mr. Pesek are not addressed, the changes to FDI policy and such other measures will prove to be only cosmetic. In its bid to please all as elections draw near, however, the government has only drawn up measures that have proved to be highly ineffective in accelerating the economy.
Real reforms which will bring in more money that can be used to create a social security net besides truly enabling and empowering the poor are the last things on the mind of this government. Important legislations like the Companies Bill and the Land Acquisition Bill continue to hang fire while the government keeps itself busy with doling out subsidies and fire fighting the stagflation, current account and fiscal deficit.
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