Super-powered SEBI

As SEBI didn’t have to face many hurdles on getting its proposals accepted by Govt, it must play with its newly gathered cards efficiently so that no corner can levy criticism against its functions.

Heartiest congratulations to Securities and Exchange Board of India (SEBI) for its post-silver jubilee gift from Government!! Through Securities Laws Ordinance, 2013, finally SEBI received what it long wished for in order to effectively practise its regulatory responsibility. This ordinance vests SEBI with sweeping powers which will go a long way to establish it as one of the most powerful market watchdogs in the world. It’s interesting that such an important and long-awaited legislation was quietly promulgated by Govt. through ordinance route at the time when nation remained focused upon Sen-Bhagwati slugfest, Food Security Ordinance and evergreen Modi-Rahul debate. As SEBI didn’t have to face many hurdles on getting its proposals accepted by Govt, it must play with its newly gathered cards efficiently so that no corner can levy criticism against its functions.

Although there is already a section contending that draconian powers have been accorded to SEBI which might be misused but given SEBI’s meek attempts to attack on fraud companies in past, escalating its influence as market regulator had become a necessity. For instance, in the recent dispute between SEBI and Sahara, former could not yet convict latter due to its inability to recover funds latter accumulated by illicit schemes. But now, not only can it penalize such defaulters but also realize penalties by attaching and selling their immovable properties.

In a major development, new law has empowered SEBI to access investigative information from non-listed entities too which don’t fall under its purview and also from susceptible investors. Until now, it could ask for information only from regulated entities, listed companies and banks. Moreover, it is now authorised to launch search and seizure operations at company premises it suspects of wrongdoing. No approval from magistrate will be needed; SEBI Chairman’s consent will be enough. Also, now SEBI can monitor phone call data without court intervention, something which it long sought for in order to investigate claims of insider trading and manipulation in the country’s capital markets. Though it is still bereft of power to tap phone calls and access mail transcripts yet getting call records including its discretion to launch search in seize exercise will help its investigation team to connect the dots better.

Keeping in view chit funds fraud especially that of Kolkata-based Sardha group, amended act now provides legal sanction to SEBI to monitor and take actions against those illegal collective investment schemes(CISs) whose capital base amounts to more than 100 crore. Although it doesn’t have jurisdiction over CISs floated by registered chit fund companies, mutual funds and Non-Banking Financial Institutions but all such, if found illegal and contains corpus beyond 100 crore, will be regulated by SEBI. Ordinance also mandates for establishing special courts to speed up the trial process so that the backlog cases can be cleared up and new cases can be expeditiously wound up.

Though amended SEBI Act is excellent and definitely furthers the objective of making regulatory system effective, few of its provisions might be conducive to ambiguity in regulation. For instance, now that SEBI can question non-listed entities and also has power to define what constitutes as CIS, institutions regulated by RBI such as banks, NBFCs etc and chit fund companies, nidhis regulated by state govt., in special cases, will fall under the ambit of SEBI too. Such loopholes in the absence of detailed guidelines might lead to regulatory confusions in financial market among various regulators.

Thus the ordinance empowering SEBI with far-reaching powers is a welcome move by Govt. in order to protect gullible investors from fraud investment-collectors. But given that SEBI’s jurisdiction has now gone beyond stock market, it must stay cautious so that no clashes of powers, no turf wars incepts with other financial market regulators. Now, it would be interesting to wait and watch how SEBI delivers on effective governance with its newly acquired regulatory powers.

Rupee Dearer Growth Sufferer

Dear Mr. Subbarao, your last monetary policy review as Central Bank Governor can be exceptional if only you could dare to lower down policy rates in order to get our slackening growth back on fast-track. That’s the only panacea Sir while rest is just nostrum.

Rupee Rescue Mission on the part of Reserve Bank of India (RBI) is on. While it can’t admonish foreign investors on their exit-spree but at least it can twist ears of internal perpetrators putting downward pressure on rupee. RBI, in order to prevent speculation in currency market causing pseudo demand of rupee, tightened liquidity via putting restrictions on banks to avail and let availed easy access of money. Also, RBI is of the view that concomitant raise in interest rates giving arbitrage advantage to foreign investors might persuade them to stay invested in Indian debt market. However, these measures have been taken at a time when market was hoping for a rate-cut and has gone highly discouraged on the prospect of increased borrowing cost. Given that one week has gone yet no major improvement could be seen on rupee front, it seems that these measures instead of bearing fruits will rather end up crimping country’s growth which is already running at its decade low.

To explain in detail, following three key steps have been taken by RBI governor D. Subbarao to tame rupee volatility. Firstly, he has put a cap on overnight transaction between RBI and banks and also among banks themselves. The overnight borrowing limit for the system now stands at 75,000 crore for the entire banking system. Earlier there was no such limit. “The allocation to individual banks will be made in proportion to their bids, subject to overall ceiling.” Secondly, in case any bank falls short of liquidity, it will have to borrow money from RBI at steeper rate through Marginal Standing Facility (MSF) window. MSF is an emergency liquidity facility under which banks can borrow from RBI for short-term by pledging government securities. MSF rate, which is 1% above the repository rate (7.25%), has been raised by 200 basis points and now stands at 10.25%. Thirdly, RBI intends to sell bonds worth 12,000 crore under its Open Market Opertaions (OMO) i.e. auction of government securities in secondary market. However, it could only suck out Rs 2,532 crore through OMO, which is about a fifth of the Rs 12,000 crore as bond investors are looking for higher yields which RBI refuses to accept.

Ironically, though these measures didn’t help much where those were supposed to but their after-effect will surely lead to banks’ balance sheet getting embattled. Banks are already suffering losses at loan-recovery front due to enormous extent of Corporate Debt Structuring (CDR) of various companies and current raise in lending rates won’t bring them more borrowers. Thus their profit earned by interest on loans might not increase in the proportion of their liability to pay interest on deposits leading to Net Interest Margin (NIM) coming negative. Also, due to tightened liquidity, banks will have no other option but to resort to escalating deposit rates in order to rein in their capital shortage. Apart from this, higher borrowing cost will not only affect consumers’ purchasing power but also make it tough for industries to keep up with production in the want of cheap credit. It’s worth mentioning here that India’s industrial production has already slumped to negative side if compared to last year and is all set to slide down more.

Now that RBI’s rupee- rescue mission is being faded out as a non-event with no major development in sight, RBI is stuck in catch-22 situation where neither can it terminate these measures abruptly, nor can afford to go on with it. It seems that rupee’s rout has become a structural challenge and nothing much can be done to stem its volatility. Only lessons can be learnt that huge reliance on foreign capital while domestic economy is off-track can bring serious repercussions at any time with no preparation beforehand to tame them. It is pertinent to improvise on internal resistance against maladies as external weather can’t be controlled. On this note, dear Mr. Subbarao, your last monetary policy review as Central Bank Governor being held on 30^th July can be exceptional if only you could dare to lower down policy rates in order to get our slackening growth back on fast-track. That’s the only panacea Sir while rest is just nostrum.

FDI: Foreign Deferred Investment

It’s pertinent to avert the on-going crisis rather than disguising the truth and marketing concurrent economy that has no buyer even on discount.

Pompous road shows cannot charm smart global investors, Mr. Chidambaram. Stop running from pillar to post to woo them and openly accept the acerbic truth of Indian Economy’s battered state. Foreign inflows are drying, imports are rising, and Current Account Deficit is widening, to top them all, even Indian Rupee is sinking.  No sane investor would head to India in current circumstances. Wasn’t it enough insulting, Mr. Chidambaram, that two US trade representatives bluntly endorsed negative sentiment about India just a couple of days after your so called road show at US? It should be. It’s pertinent to avert the on-going crisis rather than disguising the truth and marketing concurrent economy that has no buyer even on discount. Foreign Direct Investment is needed. No doubt. But, what is more needed is to generate self-convincing investment sentiment which would naturally draw foreign investment at home. Won’t you agree Mr. Chidambaram?

For reforms on FDI front, you recently constituted a committee under the chairmanship of Economic Affairs Secretary Arvind Mayaram which recommended raising the FDI cap in various sectors such as defense, multi-brand retailing, telecommunications etc in order to spur investment. You are all for this FDI-cap-hike binge but it’s highly unlikely if it would impress investors as it is more profit not more control what they are looking for and current economic situation is not in the position to offer that. Thus, it doesn’t matter whether 51% FDI in multi-brand retail is allowed or 74%, whether 100% FDI is permitted in telecom or less than that, overseas companies won’t consider India as investment destination as long as investment sentiment in the country doesn’t approve.

Did you notice that serious investors are getting repelled from India while, worryingly, corrupt and crooked ones who are approaching it? It’s a further damage to India’s reputation that Foreign Investment Promotion Board (FIPB) rejected three FDI offers as they happened to abuse India’s Double Taxation Avoidance Treaty with Mauritius. Given the brazen internal corruption, perhaps India is globally perceived as a country where malign business practices can be readily sustained. You must change this perception.

No doubt it’s non-transparent, corrupt and poor governance which has created clouds of uncertainty around Indian economy.  That doing white business in India is risky has become a general notion. From 2G scam, coal scam to recent jet-Ethihad deal, no overseas deals are bereft of controversies. Any sincere investor looking forward to setting-up long term business in the country would expect transparent and stable laws but India is a country where policies can anytime be transformed and deals can be withdrawn. Therefore, as long as there is no transparent and expedite governance model to execute foreign deals, India would remain a turn-off investment destination for overseas investors. After all who would want to stuck in arduous mis-management maze such as India has! Right, Mr. Chidambaram?

India is a federal country where consent of state governments is required for any policy to fructify. It is animosity between center and state governments which, many times, leads to hassles in the implementation of any scheme. For instance, 51% FDI in multi-brand retail had been approved long time back in December 12 but no proposal for the same has been filed yet as final decision whether to allow FDI rests with the state governments and most of them are unwilling thus unforthcoming  to welcome foreign retail giants in their particular state. This non-supportive approach of state governments also works as a turn-off for investors. You would certainly second it. Right, Mr. Chidambaram?

You must also know that  Indian rupee’s roller-coaster movement, country’s chronic high inflation and expensive credit due to higher interest rates eat on the real returns on investment. Also their indirect impact causing fluctuation in energy prices, land shortage, skyrocketing land tariff, time-taking approvals at various stages etc are few other infrastructure bottlenecks which dissuade global investors to set-up business in India.

Therefore, being a sensible Finance Minister, you must hit on exactly where the problem lies, which you very well understand but hesitate to accept. Don’t you know that spending on populist schemes like Food Security Bill will only aggravate macroeconomic challenges? Aren’t you aware that it’s cronies and corruption which repels serious foreign investors from India? Also, you very well know that trumpeting false about India as investment destination or your efforts to increase foreign investment limits are meant to come to copper. Seemingly it’s better to accept that India’s internal governance challenges can never be worked upon. Forget about foreign Direct Investment. It’s Foreign Deferred Investment till the time suo-moto rejuvenation of India's macro-economy doesn't take place. That’s what you want to convey, Mr. Chidambaram?

Food Insecurity Bill

despite seething failure of Right to Education and Right to Work due to the same reasons feared for Right to Food, if Government could still dare to experiment with NFSB, salute to its vigour.

Salute to Sonia Gandhi!! It is thanks to her that UPA-acclaimed panacea for India’s chronic malnutrition has been finally taken up; now that President has signed on Food Security ordinance. Overwhelming it is to witness the restlessness of UPA-2 that it, for the sake of millions of poor, did not even let democratic principles become hurdle in the promulgation of National Food Security Bill and pushed it through ordinance route despite opposition’s lambaste that Monsoon Session of Parliament is just few weeks ahead. Who cares the bill has been hanging in balance for the past four years! Current haste of UPA in the election year will at least refurbish its image among good chunk of gullible voters. Who cares that Indian economy is in tatters and can’t bear the brunt of subsidies! At least ours is a benign, people-centric Government whose prime motto is to remain politically correct not economically. While rupee-slide, inflation-rise and growth-fatigue might attract criticism of economist-elite but doesn’t matter! At least political benevolence when election is looming will influence the election-time-elite i.e. destitute populace enjoying political freebies.

Far-sighted UPA is praiseworthy that through NFSB it sanely transforms its social-obligation to provide food security to its population into their legal right to ask for it. For the first time any food subsidy scheme legally entitles whopping 67% of Indian population to avail 5kg rice, wheat and coarse grains from Govt. at respectively 3,2,1 rs. per month. Though it will raise the food subsidy bill to 1.2 lakh crore from 90,000 crore but at least 67% of the population will remain indebted and grateful to UPA’s munificence. It is commendable that Govt. is willing to feed (fund) the king of populist schemes though its Exchequer cannot afford to feed even a feeble-soldier-like populist scheme. UPA’s confidence and optimism must also be praised as it could rely on creaky Public Distribution System. Who cares that it has often been blamed for massive pilferage, at least people can now move to courts if they get denied of subsidized hoards, thanks to Centre and state level Grievance Redressal Mechanisms. Heart goes out to this right of people. PDS will not be fixed. Identification of beneficiaries will not be improved. But complaint can be lodged if Right to Food is not availed. As if complaint or for that matter punishment will bring food security to people! A person whose condition binds him to depend on Govt. bounties in the first place can ever be in a position to fight against govt. authorities/bureaucracy?  Well if UPA assumes so, one can’t help but believe so!

62.3 mt of food grains will be needed per year to meet out to scheme beneficiaries. Needless to say Govt. will become the biggest buyer of food from farmers distorting the already dilapidated agriculture market in the country. Who cares that Indian food market will be practically nationalized, at least Govt. will have enough food freebies to woo number of poor voters. Indian Government is bound to not conform to global trend of setting in competitive participation of private players in food market. After all, it will unnecessarily improvise food purchase-sale system in India, paving way for sufficient incentives to farmers and quality of food on cheaper price to consumers. Also, it would curtail Govt.’s monopoly over food market, something which should not happen as it is the interests of people in power not that of consumers, farmers or poor which ought to matter under the revered regimen of UPA.

 A section of people might argue that there is no dearth of food subsidy schemes in India. It is only poor identification of needy and poor implementation of schemes which causes subsidies not reaching to who it is meant for. They might further contend that fixing the loopholes of PDS and getting authentic poverty estimation through Social Economic and Caste Census (SECC) data or any other means is the pre-requisite for any food subsidy scheme to fructify the desired results, but they are missing out on most important logic. While such steps might actually bring in food and nutrition security for undernourished but would not guarantee votes. Why to bother, why to invest time in such social-welfare which does not accompany political-welfare.

Given the fracas over ordinance route and a widely held belief that UPA alone is likely to reap the benefits of implementing a populist scheme, rival state governments will remain hell-bent to tone down the positive impact of NFSB, if any, in order to not let UPA point-score. Who cares that Center state animosity will be the biggest cause why NFSB will prove to be an expensively disastrous scheme; at least it serves the political purpose of different political parties. Thus, despite seething failure of Right to Education and Right to Work due to the same reasons feared for Right to Food, if Government could still dare to experiment with NFSB, salute to its vigour. Long live Sonia Gandhi! Long live UPA!

Double Trouble

To maintain forex stability at the time of QE withdrawal and maturation of external debt is going to be a tough call for Government.

Reserve Bank of India recently reported that India’s external debt i.e. loans borrowed from foreign lenders has reached to as much as 21.2% of the GDP ($390bn) as of March end. The news has come in the backdrop of depreciating rupee which has already crossed the psychological 60 due to dearth of dollars in the country and might even go up given the series of internal and external structural challenges. Though the recent Current Account Deficit data standing at 3.6% of GDP for Jan-Mar quarter as compared to 6.7% of the previous quarter has rekindled the hope of strengthening rupee but rising external debt and their soon-to-come maturation period certainly spills water on this hope as repayment of these debts has to be made in dollars, thus causing upward pressure on rupee.

External debt mainly consists of External Commercial Borrowings (ECBs), NRI deposits and short-term credit. Worryingly, the share of short-term debt stands at 44.2% of the total debt which has to be repaid in the next one year. By the same time American Federal Reserve will also be tapering off quantitative easing (QE) as announced by Fed Chief Ben Bernanke few days ago. During American recession, under its QE policy, Fed was pumping $85 bn dollars in the economy on monthly basis which is going to be rolled back as American economy is back on the recovery path. India being the biggest beneficiary of American QE will now turn out to be the biggest loser as its major source of capital inflows i.e. Foreign Institutional Investment (FII) is likely to be ended by mid 2014. In fact, impact of this announcement is already palpable given the free fall of rupee for the past few weeks as many foreign investors have been selling out their bonds and stocks from Indian market. To maintain forex stability at the time of QE withdrawal and maturation of external debt is going to be a tough call for Government.

While Govt. has no say in decreasing or increasing FIIs inflow but it must try to control external borrowings. Cheaper foreign money prompts India Inc to borrow funds from other countries while lending rates in India are skyrocketing with no sign of coming down due to high inflation. Although external borrowings has a positive side too as it stimulates dollar inflow in the economy but relying on ECBs, short-term credit or NRI deposits etc. for forex stability is dangerous due to its being highly volatile. Now that the value of rupee against dollar has been sharply falling, it might lead Indian companies to pay their foreign debts sooner than later as their repayment amount in dollar terms is piling up due to exchange rate vulnerability towards rupee. Their dollar-demand for repayment will further cause rupee to weaken against dollar. Considering this, RBI along with Finance Ministry would better adopt measures to maintain internal stability rather than becoming victim to external sector vulnerability. Yet RBI recently eased ECB norms in order to attract dollar-inflows. It can be temporarily acceptable for short-term boost to rupee but certainly not a viable option given the risk factor associated with it.

India’s heavy dependence on imports is the root cause of its weak currency which is also the bedrock of rising inflation i.e. the prime cause of economic slowdown. India stands at fifth position among countries having largest coal reserves yet it is one of the biggest importer of coal due to poor coal-mining in the country. Also more than 80% of India’s oil demand is met via imports. It is also the biggest importer of gold which had raised India’s CAD to unprecedented level. However, gold import could be curbed by bumping up import duty on the same but it is difficult to divert people’s attention from this yellow metal for its being a sure hedge against inflation. Stringent measures have to be taken by Finance Ministry and RBI to mitigate India’s heavy reliance on imports as direct and indirect impact of rising commodity prices and services chargers not only surge inflation but also raise production cost thus making export products costlier leading India to lose in competitive export market from other countries offering cheaper products.

India is stuck in a gruesome vicious cycle. Solution of one problem works as the catalyst for another. In this backdrop, finding a balanced solution and thus shifting to virtuous cycle is a herculean task for Government. Tough times for Indian economy and the lesson must be learnt that heavy dependence on precarious global economy while being in throes of weak domestic economy is not prudent. A robust, domestically sustained economy can only bear the brunt of sudden emergence of internal and external turbulence.

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.