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FDI norms, subsidies & more - Views on News from Equitymaster
 
 
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  • Aug 8, 2008

    FDI norms, subsidies & more

    Inflation hits 13-year high
    Wholesale price based inflation numbers for the week ended July 26, 2008 rose to 12.01%. This is the first time the number has breached the 12% mark in 13 years on the back of soaring food and non-food article prices. However, as indicated by policymakers from the Reserve Bank of India (RBI) and economists, it is expected that lower crude prices and monsoons will lessen inflation going forward bringing the number down by the end of the year. It may be noted that last week the RBI had raised its key lending rates - the repo rate and cash reserve ratio - to 9% each with a view to keep inflation expectations and rising prices in check.

  • Also read - RBI doesn't give up

    Heightened security to affect FDI norms
    Foreign direct investment (FDI) in sensitive sectors such as airports and ports is likely to be screened from the standpoint of national security going forward. Currently, 100% FDI in greenfield airport projects and 74% FDI in existing projects is allowed under the automatic route, while 100% FDI in all port projects get a similar approval. As per the home ministry, FDI in these sectors in the future will not get automatic approvals and will have to be screened under the National Security Exception Act. This act is said to be modeled on the Exxon-Florio provision in the US, under which foreign companies can be denied ownership of local assets if it compromises on internal security.

    While several ministries were earlier apprehensive of such a law, they are now having second thoughts on the back of heightened security concerns. The main concern is not about the infrastructure building, but the flow of money from tax havens like Mauritius. However, the finance ministry is against the enactment of new laws. It feels that strengthening existing laws and better enforcement is a better option as new laws send out negative signals to potential investors.

  • Also read - Not FIIs, but FDIs are coming in

    Oil subsidy has a close cousin
    And that is the subsidy that the government provides on fertilisers. The subsidy burden on fertiliser is pegged at around Rs 1,200 bn for FY09 on the back of a spike in the international prices of urea and other inputs, which have to be imported. It may be noted that this is equivalent to about 50% of the amount of gross under-recoveries suffered by the oil companies. Interestingly, the government has sanctioned only Rs 310 bn in the Union Budget on fertiliser subsidy. Just as the selling prices of petroleum products in India are kept low, fertiliser prices are also artificially subdued. The ministry of chemicals and fertilisers has assured the fertiliser manufacturers that even if the subsidy burden crosses the Rs 1,200 bn mark, they will still be compensated fully, most likely in cash. While the farming community does need inputs at affordable prices, we wonder whether the time has come for direct cash assistance to the needy rather than indirect subsidies. Such subsidies have the undesirable effect of distorting price signals and also make life difficult for manufacturers.

     

     

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