Too many ministries working at cross purposes
A day after ratings agency Fitch revised its India outlook to stable—only S&P now has a negative outlook—finance minister P Chidambaram did well to soothe investor sentiment by outlining some of government’s plans over the next few weeks. These included a likely solution to coal- and gas-pricing, easier norms for select categories of FIIs like Sovereign Wealth Funds—the raising of FII limits for gilts on Wednesday were done only for SWFs since long-term money is what India needs—and better project management. The FM promised a review of FDI caps based on their utility—between 26% and 49% FDI, for instance, there is little extra control an investor gets; ditto for between 51% and 74%. The biggest cheer came from the Cabinet meeting that deferred a decision on getting the Food Security Bill through by way of an ordinance—a special session of Parliament will be called to pass the Bill which, going by CACP estimates will cost upwards of R2 lakh crore per year for the first 3 years and will be as leaky as the current public distribution system.
There has been, there is little doubt, a flurry of activity since Chidambaram returned to the finance ministry last August in terms of the projects cleared by the Cabinet Committee on Investments and the PM has announced, as FE reported Wednesday, a project management cell to monitor stuck clearances for 215 projects to whom banks have already lent R7 lakh crore. A more liberal oil exploration policy is being put in place to allow firms more flexibility in operations. None of this, however, is going to calm FIIs who have continued to pull out money in debt markets every day since May 22—a total of $3.8 billion till date; on Tuesday and Wednesday, $319 million got pulled out from equity markets as well, taking total investment in equity to just $852 million since May 22.
The problem is investors have been made a lot of promises—in just 4 days after Parliament passed FDI in multi-brand retail last December, FIIs brought in $1.4 billion in debt and equity markets, but 6 months later, the industry ministry has created so many roadblocks, not even one FDI proposal has materialised. The same industry ministry is now in the process of blocking foreign pharma firms buying existing Indian firms as a result of which lots of proposals for this are pending with the FIPB. Despite an announcement in the budget, the coal ministry has still not relaxed conditions for private miners to come in; while the power and fertiliser ministries are understandably against raising natural gas prices, even the petroleum ministry is playing their game by recommending just a $6.5 per mmBtu price which will render deep sea exploration unviable. Coal-price pooling, similarly, is being opposed by the power ministry even though it benefits everyone. If coal-price pooling is done on all 100,000 MW of power, this means a price hike of just 18-20 paise per unit—while this will help get 35,000 MW of power capacity on stream, the power can be sold for much more, making it a win-win for all concerned. With the possibility of global liquidity reducing over the next 6-8 months, jittery investors need to see some real action.