Reforms fail to enthuse foreign investors

In this issue:
» UPA's fiscal track record is pathetic
» Has RBI failed India?
» RBI helped bond markets
» PIMCO feels QE will not end before 2016
» and more....

00:00

The Indian government introduced a slew of reforms last week. All of these were related to increasing FDI (Foreign Direct Investments) limits in different sectors. The motivation behind them was to boost the much needed FDI flows into the country. The Finance Minister stated that these could bring up to US$ 20 bn into the country. But the question is will the foreign investors actually invest in the country?

To answer this question let us go back in time. Last year, the government had approved FDI in retail. Despite the approval, not much headway has been made on this front. Why? Because of the complications and vagaries in the policy. The lack of clarity and other bureaucratic issues have deterred most of the major retail chains. Even global giant Wal-Mart has been rethinking its plans for India.

Jump to current date. Things have not been shaping up well on the FDI front. Last week global steel maker, Arcelor Mittal, had declared its plans to abandon its US$ 8.4 bn investment plan in Odisha. Reason? The company was facing extended delays and problems in acquiring land. Korean steelmaker Posco too abandoned its US$ 5.3 bn plan of investing in Karnataka. The delay in securing iron ore mining rights was the reason for this. There have been other instances where global companies have stated their apprehensions about investing in India. Even Warren Buffet's Berkshire Hathaway, has indicated that it would shut down its Indian insurance business.

So why is it that global companies are not enthused with the FDI reforms being made by the government? The reason is that even though the government has allowed/increased FDI; but it has not really brought about reforms in other key areas. Key issues like mining rights, land acquisition, taxes, etc are still under a cloud of uncertainty and red tapism. Unless these are addressed and resolved, investors would not be very keen to lock up huge sums of money in the country. The government has taken the first step towards reforms. Now it needs to follow through on its exercise to boost confidence among investors both domestic as well as overseas. Otherwise the approvals would remain just that and not see any action.

Do you think that the recent increase in FDI limits would actually boost foreign investment into India? Please share your comments or post them on our Facebook page / Google+ page

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01:10		Chart of the day

Times are bad in India. The economy has been slowing down. Infrastructure has been in a sad state. The Reserve Bank of India (RBI) has kept a tight grip on the monetary side as inflation continues to burn. As a result the corporate profitability has come under pressure. And this has hurt the pay increases doled out at least to the top management. The Mint recently carried out a survey of the pays given to the directors of 27 out of the 50 companies that form the NSE-Nifty. As per their survey, there was an increase of 18% YoY in the directors' pay. This is the lowest increase in the past 3 years. But if we compare it to how things were in FY09 and FY 10, the increase is much better. For in those peak years of crisis, the director pays had actually declined. So does it mean that despite being bad, things are better than what they were back then? The answer to that is probably yes which is why director pays continue to rise. But the outlook for the future happens to be grimmer. Therefore as prudent investors we would question whether the companies are justified in increasing the pays to senior management when they have not really delivered commensurate performance.

Source: The Mint

01:55

As per the Mint, the United Progressive Alliance (UPA) is to blame for India's poor fiscal deficit position. Prior to coming into power in 2004-05, India's fiscal deficit stood at 3.88%. In FY13, the same stood at 4.9%. So what went wrong over the years? As per Mint, there are three main reasons. First are the various stimuli that were given in response to the financial crisis. These include tax sops that were given, leading to lower revenues. On the expenses side, it was mainly the Pay Commission award that led to a major blip in expenses. Further, the higher oil prices led to increased subsidies. In fact, it was the increase in the latter two unproductive expenses which led to the revenue expenditures. As we have been stating, passing on the prices of the increased oil expenses was something the government should have considered long ago. On an overall basis, the share of revenues expenditures remained flat as compared to what they were eight years ago. While that of capital expenditures declined over time. As per the business daily, this led to supply constraints. The article concludes with the statement of the government taking short term measures to pretty much postpone the downturn.

While these numbers do indicate that the UPA's performance with managing the country's deficit levels has been less than unsatisfactory, the fact of the matter is that the crisis situation was bound to happen. This we say because the quality of the fiscal deficit has been worrisome for a while now. But all the more off late! The share of capital expenditure in fiscal deficit has deteriorated from 40.3% to 11.3% over the last four decades. While that of revenue deficit has grown from 44.8% to 76.4% during the period. The mix of these two expenses is what will bring about a major change in the deficit numbers over the long term.

02:45

RBI's measures last week came as a bit of a shocker. However, given the circumstances, they were certainly necessary we believe. But did they have the effect they were intended to have? May be not. The measures were intended to stop the decline in rupee. But almost a week after RBI took those steps; the rupee has gained by just 54 paise. Certainly not the kind of appreciation RBI would have sought. Especially in light of the strong measures it took.

So, what went wrong? Well, an article in livemint has given a pretty lucid explanation. It observes that everybody in the Government kept on harping that the measures by RBI are temporary. This took away a great deal from the shock value of these measures. Besides, the other thing that the RBI had hoped for was to drain the excess liquidity from the system. However, the central bank wanted to achieve this without letting interest rates climb. But this is a near impossible thing to have and hence, this measure also suffered the same fate of not having the intended effect.

At the end of all this, one needs to ask why RBI's measures were so half hearted? Well, it has to do with the pressure from the Government perhaps of keeping the interest rates low. However, these measures have hurt the bank's credibility and it needs to win it back by not bowing down to Government pressures and let interest rates find their own level.

03:35

Stocks and commodities have been 'no-go' asset classes for most Indian retail investors for a while now. Over the past two years, as India's GDP growth derailed, corporate earnings took a hit and the global crisis impacted demand for commodities, these asset classes lost their luster. Ever since the rupee touched new lows against the dollar, the outlook on interest rates has also been uncertain. Nevertheless, bonds found favour amongst investors due to their relatively low risk profile. But the latest move by the RBI to stem rupee's fall, has left a bad taste in the mouth of bond investors too.

The hike in short term interest rates took bond prices to unexpected lows. Thus those speculating over possible cuts in interest rates in the near term succumbed to losses. The 10 year government bond that was at 7.1% prior to rate hike has gone back to 8.1% levels. The upcoming monetary policy may also bring in some surprises. So, should investors stay away from bonds too? Well, we believe that speculation, not just in bonds but in any asset class is fraught with risk. An article in Firstpost opines that bond investors with a long term fundamental perspective will reap the benefits of investing now. We quite agree with the view. And also believe that investors in other asset classes such as stocks too should not lose sight of long term value.

04:05

Ever since the US Fed announced its intention of tapering off its QE program, global markets around the world have been rather volatile. Indeed, most of the rally across the markets has largely been a product of too much money chasing various asset classes. And if the Fed withdraws this excess supply of money, asset prices were bound to suffer. The Fed's rationale for such a move was the belief that the US economy was on the mend. But has that really been the case? We think not. And what is more, Mr Bernanke now probably has doubts on this front too.

Indeed, Pimco's Bill Gross opines that the US Fed will not wind up QE till 2016 at least. That will be the earliest date assuming that economic conditions improve by then. We were always skeptical of the Fed's stance that the exit from the QE was going to be smooth. This is because the buoyancy in the markets does not reflect the ground realities. And these are quite stark. Massive government debt, unemployment and weak job prospects are some of the important problems afflicting the rich world to name a few. And QE seems the only solution that the central bankers around the world want to rely on however unsuccessful it has been.

04:35

In the meanwhile, after opening the day on a positive note Indian equity markets continue to trade above the dotted line. At the time of writing, the Sensex was up by about 107 points (0.5%). Barring Indonesia, the other Asian stock markets closed the day in the green with markets in Singapore and Taiwan leading the gains in the region.

04:55

Today's investing mantra

"Risk comes from not knowing what you're doing." - Warren Buffett