FDI in Retail:
The opening up of the Indian retail sector to the world players by allowing 100% foreign direct investment (FDI) in single-brand retail and 51% in multi-brand is a sign of more forced reforms to come.
The issue of FDI in retail is a long pending one and the government did not act on it earlier due to political compulsions when it was supported by the Left and due to more urgent issues stemming from the credit crisis in 2008 and scams in 2011. On a long-term basis, the opening up of FDI in retail is positive for both inflation and the rupee as global retailers look to set up shop in India.
The government was forced to take the decision of opening up the retail sector due to one ,the rupee depreciating 15% against the US dollar and secondly, inflation staying at over 9% levels for six consecutive months. Even opposition from a key ally in West Bengal did not deter the government when it announced the higher FDI in retail. Money will not rush into India on the back of the announcement, but it is a positive reform measure under forced circumstances.
FDI in the airline sector:
The government is also considering allowing FDI in the airline sector, which faces headwinds due to structural issues in aviation in India and the near-bankruptcy of two large carriers — Air India and Kingfisher Airlines.
FDI in the airlines sector has been an issue for many years with the government even blocking a proposed joint venture between the Tata group and Singapore Airlines.
The FDI proposal for the airline industry is again a forced policy measure as a healthy airline industry is crucial for the infrastructure of the country and if three of the largest airlines (Jet, Air India and Kingfisher) are in the red, it does not bode well for aviation in India.
Increase in FII Limits in Bonds:
In related currency developments, the government increased the foreign institutional investor (FII) limit for government bonds and for corporate bonds by $5 billion each, taking up total FII limits to $15 billion for government bonds and $20 billion for corporate bonds. The previous limits were almost fully utilised and there was more demand from FIIs for investment in Indian debt, despite a weakening currency. The limits will get filled up gradually but will, all the same and this is positive for the rupee.
Reforms in Oil and Power Sectors:
The government needs to address two sectors that are in dire straits — oil and power. The government is not allowing the pass-through of higher costs to the end user and this is creating deep holes in its pockets as it has to ultimately bear the burden of the subsidies. Indian oil marketing companies have lost almost `65,000 crore in the first half of this fiscal for selling fuel below cost.
The power sector is in deep trouble with state electricity boards (SEBs) suffering losses, as they are not allowed to sell electricity at cost to the end user. The SEB losses are estimated at around Rs100,000 crore as of October 2011.
Power producers are reluctant to sell power to SEBs as they do not get paid. As a result, even if power is available in plenty, there is an artificial shortage of power as SEBs are not able to source power at cheaper rates.
The end result of subsidies is the government’s fiscal deficit going higher than projection leading to rise in borrowing costs. The government’s fiscal deficit for 2011-12 is expected to exceed budget estimates of 4.6% by 1%. Bond yields have risen by 60 basis points on the back of higher-than-expected fiscal deficit.
Source: DNA India.
Thanks,
Gaurav Agarwal
Head Dealer
DENIP Consultants Pvt Ltd
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