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A Long Way To Go...

Monday, September 17, 2012

In a series of quick and unexpected moves, the government got into action mode and announced a series of fiscal reforms, last week. But are these enough? Mayura Shanbaug spoke to industry and market leaders and brings back the view, that, at least, the “despondency that had set in owing to absence of policy announcements would certainly be addressed to some extent. Global and domestic perceptions would also change…”

The weekend was action packed due to the flurry of measures taken by the beleaguered United Progressive Alliance government of Dr. Manmohan Singh. The question is whether the decision will prove to be a step towards the second round of reforms promised by UPA or is it a case of too much, but too late. First, the bold diesel price hike and the cap on LPG cylinders, and then the cabinet decision on allowing 51 % foreign direct investment (FDI) in multi-brand retail and 49 % FDI for foreign airlines in aviation. These apart, disinvestments in a few key public sector undertakings like Oil India, Nalco, Hindustan Copper and MMTC have also been cleared.

Do these decisions have potential to pull the country out of the down ward spiral and avoid a possible downgrading, which is an existing scare and will it be able to propel growth back 2010 levels?

 “It is government’s biggest ploy to make the people of India feel and believe that FDI is some magic wand which is going to improve the lives of a common man ,” said Suresh Prabhu, former Union Minister for Power, on the sidelines of the seminar 'Indian Economy: Road map to Recovery' organized by IMC last week. “The country has humungous accumulated losses of crores and that is too much of a liability,” he said.        

“It is very difficult to predict GDP growth as this is based on several parameters. Overall the decisions would improve the GDP in the longer term,” says Clifton Desilva, Director, Altina Securities. “Its good for the individual sectors, as it was long overdue. It will improve the general business sentiment,” he adds.

Even if the industry and country at large is in overdrive to praise and anticipate the positive impact the decisions are going to have on overall business sentiment in the country, the actual test for the government is to extract itself from the position of extreme difficulty to the position of advantage by felicitating the growth environment further, feels Ramesh Bhojwani, a Mumbai based Senior Analyst. 

Already, the latest figures have shown inflation once again shooting up to 7.55 %, a steep spike from the July figure of 6.87 %, reflecting that the price rise will continue to be a worrying issue for the government as it heads into election season.

“Besides, a serious slowing down in factory output, with the Index of Industrial Production at a measly 0.1 %, means there are more mountains left for Singh and Company to climb in the days ahead,” he says. “However, the government’s decision after 30 months of policy paralysis, has come as a breath of fresh air for the gasping industry,” he adds.

“The hike in diesel and LPG prices is likely to reduce household’s budget allocation to discretionary items by 3%-8%,” says Deep N Mukherjee, Director, India Ratings & Research.   Mukherjee whose outlook on the retail sector continues to be negative, says, “Most established companies in FMCG, consumer durable and two-wheelers sectors have the balance sheet strength to withstand this potential demand slowdown.”

However, Mukherjee feels that Diesel price deregulation is unavoidable if the Indian Government wants to rein in the fiscal deficit. “Such a step, if taken, has the potential to lower government borrowing, assuming other subsidies are not increased. While the expected deregulation may ultimately trickle down to households, an immediate reduction in consumer spending is inevitable,” he says.

“To an extent, the private consumption expenditure (in real terms) component of the GDP may experience further pressure in the short term. However, the adverse impact of the price hike on consumer spending can be reduced by focusing on improving food supply chain efficiency and implementing effective administrative measures,” he adds further.

In a similar vein, Adi Godrej, President, Confederation of Indian Industry (CII) says that the main risk to the fiscal deficit arises from subsidies, which are threatening to far exceed the provision made for them in the Budget.  As against the oil subsidy for the current financial year budgeted at Rs 43,850 crore, the first quarter of the current financial itself recorded Rs 47,811 crore under this head.

“The high fiscal deficit has also lead rating agencies to threaten a cut in India’s credit rating. Such an eventuality would have a negative impact on investment flows into India,” he says. “In any case, investments have been affected by RBI’s excessively tight monetary policy, which it says is due to the high fiscal deficit,” he adds.

However, many like Chandrajit Banerjee, Director General, CII feels that the move to increase FDI caps in the four sectors will help mobilize capital into these sectors, which the country needs and would also improve the current account deficit situation, which was becoming alarming. “The despondency that had set in owing to absence of policy announcements would certainly be addressed to some extent. Global and domestic perceptions would also change and we are hopeful that the rating agencies would take due note of these announcements as well,” he hopes. 

“The policy announcement is a move in the right direction as it will give a new fillip to the development of retail sector in the country,” feels Lalit Kumar Jain, National President, CREDAI, developer’s apex body.

“At least 50 per cent of total FDI brought in shall be invested in ‘back-end infrastructure’ within three years of the induction of FDI. The back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure,” hopes Jain. “Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure,” he says. “The result from the retail move could be welcome: higher prices for farmers, and lower prices for consumers,” says Bhojwani.  However, he has words of caution regarding implementation of the policies on the ground level. “The policies come with riders attached to it; it should not happen that investments that come in are shrouded in the maze of complexities with complicated sub-plots before it actually happens,” says Bhojwani.

Government has left the decision on individual states to decide whether to allow the supermarkets on their patch. Uday Narayan Dubey VP, Research & Institution Business, R K Global also feels that proper implementation is the key. “With proper implementation, macro economic factors may improve,” he says. 

Industry has also welcomed FDI in aviation. “Capital expenditure in aviation is very high, FDI will definitely help the sector in bringing in the much desired capital for airlines like kingfisher and Spicejet,” says Dubey.   
However, experts feel that the announcement may be a tad too late in case of Kingfisher as the airline has lost most of its brand image and value that would have helped in bringing in the investments. “For Kingfisher to benefit from the announcement, it should have been made last year,” say experts. Etihad, a flag carrier of the United Arab Emirates, has announced series of investments in AirBerlin,  in Air Seychelles and in Aer Lingus resulting to speculations about the opportunities that struggling airlines in India presents.    

However, Etihad Airways spokesperson clarified in a statement saying, “We see equity as a positive reflection of our partnership approach; we will make such investment where we believe the commercial prospects are strong, where we see like-minded business philosophies and where we believe such commitment will be welcomed.”  Will these big bang reforms will result in mellowing the hawkish stance of the Reserve Bank of India’s   governor D. Subbarao in today’s review of Monetary Policy?

Dubey, who feels that 7 to 7.5 % GDP growth is possible in the year FY 14 says that there will not be a rate cut today. “Since system has enough liquidity. RBI will maintain status quo,” he says.

However, Alex Matthews, Head Research, Geojit BNP Paribas Financial Services feels that all these decisions will revive flagging economy and boost GDP growth to 7.5 to8 %. “I am expecting a 25 -50 basis points rate cut in policy rates in today’s meeting,” he says.

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