Glittery Gold Jittery Government

Instead of cynically hiking import duty, Govt. would do well if it paves way for either virtual trading of gold or it should launch gold-indexed bonds instead of inflation indexed bonds.

Unmindful of its earlier failed efforts of controlling gold-import and discouraging its demand, Govt. once again resorted to the same trick by ratcheting up gold import duty to 8% from 6% (fourth hike within two years) disregarding the speculative undertone it might generate. Reserve Bank of India (RBI), in the vein of Govt., levied more stringent restrictions on banks to import gold and provide loans to public. Given the ballooning Current Account Deficit and badly depreciating rupee against dollar, curbing gold purchase seems the only viable step to Govt. to tame the imbalance of payment but it is highly unlikely if it would discourage the people to invest in gold as its being the safe and lucrative haven is a widely popular notion in the country challenging which is a tough nut to crack.

The unprecedented fall in gold prices in the month of April somewhat provided sense of relief to Government but unfortunately the impact of price-fall substantially got counterbalanced by surge in demand due to wedding and festival season in the country with gold imports touching 162 tonnes in May. Rising gold imports also pushed the trade deficit to $17.7 billion in April. Further trouble befell with the consistent depreciation of rupee which has now surpassed 57 against dollar bricking the prospect of even more widening CAD leading to even higher inflation which is already at an intolerant level.

It is in this backdrop that the Govt. has hiked gold import duty and RBI asked banks and nominated agencies to not import gold on a consignment basis for domestic use. Also, RBI disallowed import of gold on credit and advised banks to dissuade people from parking their savings in this glittery metal. Co-operative banks have been told to only lend against gold ornaments, gold jewellery and gold coins weighing up to 50 grams, amount of which must be within the Board approved limit. Though these measures might serve the purpose of Govt. in the shorter term but considering the fact that steps of similar kind have already been exercised earlier for no avail, it would not provide a medium term solution let alone long-term. The vicious cycle of yawning CAD, rising inflation, falling rupee and sputtering growth is the result of structural deficiencies but Govt. is hell-bent to put onus on Indian’s lure of Gold and fuel subsidies.

Considering the dearth of inflation-hedged investment options, Govt. has though launched the first tranche of Inflation Indexed Bonds but the fact that its coupon rate and principal amount are indexed against Wholesale Price Inflation (WPI) not Consumer Price Inflation (CPI), returns on these bonds would not be much profitable as its latter not former which directly affects the consumers. On the other hand Gold, despite its price-fall provides favourable return against rising inflation. Also, the ease of purchase, as against IIBs for which one has to go through the tedious system of opening bank accounts, filling up litany of forms, understanding complex formula etc, makes it handy and an obvious choice for investors over any other financial instruments.

Gold-frenzy is a global phenomenon. Only difference is that Government worldwide has channelled this frenzy into paper-based trading of Gold. Given this, instead of cynically hiking import duty, Govt. would do well if it paves way for either virtual trading of gold or it should launch gold-indexed bonds instead of IIBs. It is well past time to understand that it doesn’t matter how many hurdles or challenges being put up in the gold-game, Indians will bravely and enthusiastically sustain but would not give up till the end.

Rupee's Rout

Rupee meltdown has now become a structural problem and has put the country in a danger zone, coming out of which anytime soon is a herculean rather near-impossible task. 

Rupee-meltdown against dollar reached to its 10-month low this week, extinguishing every glimmer of economic-revival-hope emerging out of recent green shoots. In an import-driven country having skyrocketing inflation, rupee-depreciation brings multi-pronged negative outcomes with very little or no means to roll back to tolerant level of INR against USD. Recent GDP data, released by Central Statistical Organization, coming at a decade’s low of 5% for the last fiscal year i.e. 2012-13 has aggravated the disturbing repercussions of falling rupee denting the hope of Reserve Bank of India (RBI) going for policy rate cuts during its next monetary review. The current economic sentiment has led the rupee to fall in a vicious-cycle trap, coming out of which demands rigorous policy measures.

Though global factors like Eurozone recession, Euro weakness, monetary easing in Japan etc. , to some extent, led to rupee-deflation but failure at home to revive exports and to control its headlong inflation are primarily responsible why the value of rupee is going down. Immediate impact of this value-erosion resulted into petrol and diesel price rise by 75 paise and 50 paise respectively though global crude oil price is less than 100 Barrel. In the aftermath, inflation will certainly move upward which has been taking a downward route for last three months.

It is peculiar that 1.3 billion dollar has come to Indian shores via portfolio investment since the beginning of this calendar year yet the imports are rising unabatedly due to Indians’ lure of gold and oil import which results into ballooning Current Account Deficit and imbalance of payment.  Economy cannot rely on this so-called ‘hot money’ which can anytime be drawn out of the market. India requires huge amount of foreign capital which is invested in its core economy weeding out the prospect of capital flight. Foreign Direct Investment on sustained basis can very well serve the purpose. India has already allowed FDI in multi-brand retail and aviation yet attracting foreign investors is a pipe-dream given the domestic uncertainties like lowering growth, higher interest rates, policy-paralysis, archaic laws, political logjam and upcoming Lok-Sabha election etc. Also, global rating agency Standard and Poor’s retaining its negative outlook for India has added into the misery of beleaguered Government trying to impress foreign investors to invest in Indian Economy. Adequate foreign investment seems impossible in near future as domestic investors themselves are shying away from investing in India something which foreign investors will surely pay heed to.

Thus, if INR is perceived as a depreciating currency amidst high inflation and low growth, it will dry up Foreign Institutional Investment and Foreign Direct Investment at a time when India’s exports are not up to the required level and imports are rising with no sign of decrement, leading to severe balance of payment crisis. This currency meltdown has now become a structural problem and has put the country in a danger zone, coming out of which anytime soon is a herculean rather near-impossible task.

Not impressed!!

Political gridlock is crowding out positive impact of reforms.

To the surprise and embarrassment of Finance Minister, who has been long exerting to project India as a flourishing economy among foreign investors, global credit rating agency Standard and Poor’s has retained its ‘negative’ outlook for the country which is just one notch above junk status. Though Government doesn’t agree to it and is audacious enough to acclaim that global investors hold a different view, but this audacity is like living in a fool’s paradise and is nothing more than its face-saving exercise.

Undoubtedly many financial reforms have been announced by Government since September and also the country currently experiences various green shoots like easing-out inflation even reducing most stubborn Consumer Price Inflation, increased factory output, falling gold and oil prices leading to decelerated Current Account Deficit etc. However, why the world is not still convinced to rely on these positives is no rocket science to conjecture. India’s appalling political-paralysis resulting into acute policy paralysis, a cornucopia of corruption and scams, non-transparent and archaic laws etc has severely tainted its image worldwide which might require decades to get cleaned up.

The slow pace, at which reforms undertaken by Govt. were moving ahead, got further decelerated with a Government in dock due to series of scam revelations and an opposition in revenge-mode leading to precluded Parliament. Now it is not shortcomings at economic front but at political which has derailed India’s progress. Legion of policy bills are languishing from one session to another un-tabled or un-concluded. Spate of policy-discussions have been elasticizing from one meeting to another with no consensus to be in sight. It seems political brinkmanship in India has escalated to a toxic level where legislatures have now started compromising on even their core responsibility i.e. to discuss and draft legislation. Food Security bill, land acquisition bill, FDI in insurance, Goods and Services tax including many more bills will perhaps remain stuck till new government comes in.  S&P rightly pointed out “Given the political cycle—with the next elections to be held by May 2014—and the current political gridlock, we expect only modest progress in fiscal and public sector reforms. For example, reforms of fertilizer subsidies, introduction of a nationwide goods and services tax, easing of restrictions on foreign ownership in various sectors such as banking and insurance sectors, will take time.”

It seems that India has taken an oath to always flow against the wind. In the aftermath of global financial crisis when the whole world geared up to restructure banking industry, India didn’t pay heed to it. Now when all major countries are coming forward to clamp down on tax havens, India doesn’t seem to be taking this call seriously. When every other country is enthused with the green shoots in the global economy and trying to make the most of it, India is clogged with unnecessary political altercation at home and losing on the most opportune time to recover from the economic meltdown.

S&P must not be blamed for India’s negative rating, in fact, it would be no wonder even if it is downgraded to junk status given the disturbing trend of political logjam leading to legislation logjam which has severely dampened India’s already fading credibility at international forum. Global investors, who look for stable and transparent legislative regime for their long-term investment plan, no more sees India as a prospective investment-destination. They have gone wary, uninterested and indifferent towards Indian economy. It is high time that Government ignites its dormant insight and modestly accepts what S&P has stated. Government, which is so enthusiastically branding itself at home through ‘Bharat-Nirman’ campaign, would do well if it channelizes even a tad of this enthuse to improvise its depressing global-branding instead of national-branding.

Silver lining

it’s merely the prospect of a strong green shoot spontaneously fuelling the virtuous cycle of growth which  can lead to a revived economy, certainly not legislative insight of legislatures. 

In the vein of International Monetary Fund, recently Prime Minister’s Economic Advisory Council has also forecasted that Indian economy is bottoming out and getting back on the growth trajectory.  The emergence of green shoots in domestic and global economy like easing out inflation, increased factory output, gold and oil price fall etc. also gives the same sentiment. While global economies are trying to make the most of current green shoots, India is not being able to, due to constantly getting crippled with acute political-paralysis having been already in throes of policy-paralysis.

March Index of Industrial Production print at 2.5% has provided some relief to a beleaguered Government and Reserve Bank of India who were constantly troubled with sluggish industrial activity and sputtering growth. Reeling under the huge pressure of massive gold and oil exports, recent steep fall in gold price and decreased crude oil price has sparked the hope that India’s forex reserve will boost leading to a declined Current Account Deficit. In addition, the most significant green shoot favoring Indian economy is its assuaging inflation. Not only wholesale Price Index lowered down to 5.6% in March from 6.2% a month earlier, Consumer Price Index (CPI) has also dropped for the first time in six months, though it remained in two digits at 10.4% in March against 10.9% in Feb. Core inflation has fallen under the RBI’s tolerance limit being at 3.4% and food inflation has also somewhat alleviated. However, RBI is still cautious and refrained from adopting eased monetary stance in its Monetary Policy released back on 3^rd May 13. Going against the expectations of industry and stock market, RBI cut the key interest rate by just 0.25% to 7.25% and kept the liquidity enhancing cash reserve requirement untouched.

RBI not relenting upon policy rates is justified as India’s data computation system is not robust enough to produce micro-economic data and doesn’t give the clear picture of how small industries are faring at any given time. Therefore, it would be pertinent to wait for few more months in order to let the green shoots keep shining and solidify. It must also be noted that it is not economic constraints but escalating political-logjam that has bound the RBI to shower enthuse in the market. In the words of RBI-Chief D. Subbarao “the effectiveness of monetary policy in bringing down inflation pressures and anchoring inflation expectations could be undermined by supply constraints in the economy, particularly in the food and infrastructure sectors. Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge.”

Considering a Government dogged by scandals and corruption and an opposition hell-bent to spew venom against former, it appears that India has landed into a permanent crisis. It’s unfortunate that just because of petty political brinkmanship resulting into precluded parliamentary proceedings hindered the discussion on many important policy-decisions. Land acquisition bill, Foreign Direct Investment in insurance bill etc have been languishing from one session to another without getting tabled.

Economic recovery indicators are surely palpable. Having been in the throes of slow growth for long, this is exactly the time that India gears up to push reform agendas ahead and make the most of what global and domestic buoyant sentiments are offering. It must understand that economic slowdown is not as gruesome as the political slowdown resulting into policy stalemate. Expecting prudence on the part of Govt. and opposition at this time when general elections are round the corner is definitely like nurturing a false hope. Nothing is going to be done by these revered parliamentarians, it’s merely the prospect of a strong green shoot spontaneously fuelling the virtuous cycle of growth which  can lead to a revived economy, certainly not legislative insight of legislatures. 

Parliamentary Paralysis

Opposition-Goverment would do well by igniting their insight and pushing reforms ahead instead of getting clogged with insignificant altercation.

India is in throes of acute legislative deficit which doesn't seem to be tided over with ever increasing stand-off between Opposition and Government. It has now reached to the extent where parliamentary proceedings are getting disrupted on daily basis due to unnecessary uproar in parliament. While acrimonious political brinkmanship is the part and parcel of parliamentary form of Government which does exist in many other countries as well, but India’s situation is peculiar where acrimony between Opposition and Government has reached to a level that Parliament’s core duties i.e. decision-making and legislative functioning has come to a stand still. 

According to statistics compiled by the Lok Sabha secretariat, 1,157 hours of Parliament sittings have taken place and 634 hours have been lost on account of interruptions and adjournments until the 12th session of the 15th Lok Sabha, which was elected in May 2009. It is now well on track to achieving the dubious distinction of being the least productive in terms of business transacted among those that completed their full five-year terms.

Budget session is always the most significant session for Lok-Sabha, unfortunately, it has been the most chaotic and non-productive one for the current House especially with the resumption of second-half of the session beginning from 22^nd Apr. It is surprising that general budget and Railways budget sailed through Parliament with no discussion at all and many important bills like Food Security, Right to services, land acquisition, Lokpal etc are waiting in the cue to get parliament nod. It is highly unlikely that these bills get passed in the current session which will be ended by 10^th Nov.

The disturbing trend of political logjam leading to legislation logjam is the major dampener to India’s fading credibility at international forum. Poor governance and spate of corruption scams especially 2G spectrum and coal block allocation scam which led Supreme Court to cancel all allotments done by corrupt leaders have set a worrying precedent that deals can anytime be terminated and laws can any time be changed in the country. Global investors, who look for stable and transparent legislative regime for their long-term investment plan, no more sees India as the prospective investment-destination. They have gone wary, uninterested and indifferent towards Indian economy.

It is time that strict measures are taken to keep the parliament running. Petty politics of Indian politicians has reached to a toxic level where they’ve now started even compromising on whatever little they do for the country. Either opposition dares enough to promulgate no-confidence motion against Government or it simply let the Parliament transact its daily business. Point-scoring politics on the part of opposition and blatant denial of Government for its wrongdoings will help nobody. This is the time when global economy is reviving and India is also experiencing positive greenshoots. They would do well by igniting their insight and pushing reforms ahead instead of getting clogged with insignificant altercation.

Cheaters' County

Saradha collapse is just tip of an iceberg with many more closures waiting on the cue. It is high time that RBI and SEBI are given more teeth to inspect into the books of burgeoning chit funds companies.

With the kind of financial frauds mushrooming in every nook and corner of India, it can no longer boast of having a tightly regulated financial sector. The debacle of Kolkata based Saradha Group’s chit fund business is the recent instance of how several wheeler-dealers are indulged in investment fraud undeterred and unchecked taking innocent people on ride. While capital adequacy norms, risk controls or even basic financial disclosures are thrust upon top level enterprises but the same are hardly imposed on small entities, thus a sheer anarchy prevails at bottom level. This is a matter of concern for the nation where a good chunk of population is by and large humbly resourced and financially-illiterate prone to get easily duped.

Chit fund, ponzi schemes, multilevel marketing frauds are not new to India. Saradha scam is yet another example of what Kuber, JVG, Speak Asia etc have done with the hard-earned thrifts of innocent people. They simply raise vast amount of money from innocent people luring them of high returns, special packages or foreign tours but eventually round-trip the collected money from one depositor to another instead of creating more assets. Such fraudulent business is burgeoning at faster pace with even 10-20 people opening up unregistered committees and start collecting money projecting fake investment plans as authentic.

It is ironical that despite having independent financial market regulators like RBI, SEBI, and IRDA etc for varied financial services, fraud companies devising Ponzi schemes are kept on flourishing. The problem is that regulation of chit fund business is governed by a central Chit Funds Act 1982 as well as specific Chit Fund Acts enacted by different states. As it is a State subject, RBI and SEBI exclude chit funds from the purview of their regulations for deposit-taking finance companies or collective investment schemes and only target capital market and banking frauds. It is time that financial regulators focus on financial frauds taking place at grassroots level as nearly 60% of India is still un-banked and vulnerable to be targeted by chit funds companies operating under no control or checks. Not only chit funds but almost entire grassroots financial business arbitrarily operates in seemingly no man’s land. For instance, co-operative banks and money lenders at lower level are also no less fraudulent.

It is of utmost importance that some measures are devised to keep a check over such Ponzis as in the absence of proper monitoring system; some crooked minded fellows easily acquire political clout and leverage the opportunity to give a legitimate shape to their fraud investment plans. They even enter into media and education and facilitate money-laundering, black money economy undauntedly by the virtue of political connections.

India’s financial sector is deeply crippled with corruption and hoax activities and more so at bottom level of pyramid. Saradha collapse is just tip of an iceberg with many more closures waiting on the cue. Policymakers must not forget that financial institutions are prone to ‘contagion’ and the pace at which such fraud companies are coming into vogue; it is highly significant to strictly regulate them at earliest. It is high time that RBI and SEBI are given more teeth to inspect into the books of burgeoning chit funds companies.

Export Growth: Let's Hope!!

Reformed SEZ policy might not bring desired results in medium term due to infrastructure hurdles and bureaucratic bottlenecks for business set-up. 

Considering the declining rate of exports and subsequent rising trade deficit, the Annual Supplement to the Foreign Trade Policy primarily aims at putting exports on a growth trajectory. Not left with many options to do that, Commerce Ministry has specifically tried to rejuvenate investment in Special Economic Zone (SEZ) through amending existing policies. In addition, extension of interest subsidy to engineering exports, simplifying the transaction rules for exports and expansion of Export Promotion Capital Goods (EPCG) scheme are few other provisions of Foreign Trade Policy (FTP) for current fiscal year 2013-14. However, it doesn’t speak about what measures are to be taken to control nation’s increased dependence on imports.

As per new SEZ framework, minimum land area requirement for multi-product SEZs will be 500 hectares as against 1000 hectares and for sector-specific SEZs 50 hectares as against 100 hectares. In a bid to boost small and medium size enterprises, Govt. has done away with mandatory requirement of minimum 10 acre of land area for setting up a business. Now, small office buildings can also avail SEZ benefits as minimum land requirement for 7 major cities is 100,000 sq. m, 50,000 square meters for Category B cities and only 25,000 square meters for the remaining cities. Also, exit policy has been introduced for existing units based in SEZ who can now transfer or sale ownership of their SEZ area. To some extent these moves will help revive investor interest but SEZ developers and units are disappointed that the Government has not exempted them from Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) which primarily drove away investments from SEZ. They also contend that SEZ units must have been made eligible for focus product and focus market schemes.

FTP has done away with 3% duty Export Promotion Capital Goods scheme and harmonized it with zero duty EPCG scheme. Sectors under Technology Upgradation Fund Scheme (TUFS) can also avail benefits of zero duty EPCG scheme which entails zero import duty on capital goods meant for production. This scheme has been extended beyond March 2013. The only glitch is that authorization holders will have export obligation of 6 times the duty saved amount to be completed in a period of 6 years. The interest subvention scheme, by which interest on loans to exporters is reduced by 2% has been extended by March 2014 and also has been widened to include 134 sub-sectors of engineering and textile sectors. These steps will help improve export performance of textile manufactures and garment exporters.

According to recent data, export from India has declined by 1.76% to $300.6 billion while imports rose 0.4 per cent to $491.5 billion pushing up the trade deficit to $190.91 billion. Commerce Minister Anand Sharma has tried to deliver best possible provisions via Annual Supplement of FTP to facilitate exports in the backdrop of global economic slowdown and policy restraints at home but one must not expect a quick export jump in the wake of this policy as export promotion is a long term initiative. Even the reformed SEZ policy might not bring desired results in medium term due to infrastructure hurdles and bureaucratic bottlenecks for business set-up.