Rejigging CCS, not focussing on FDI sends poor signal
It is true that Cabinet agendas cannot be changed overnight, but with the rupee under the kind of pressure it is, and the direction of the Fed’s bond purchases known for a long time now, you would have thought the government would go hammer and tongs at trying to clear up impediments to growth and to foreign investment. Indeed, for months, that is all it has been talking about. Yet the day the rupee flirted with 60, the Cabinet cleared a restructuring of centrally-sponsored schemes (CSS); it didn’t decide on either coal price-pooling or raising of gas prices—while the former would boost growth by bringing another 30,000 MW of thermal power on stream, the latter will help bring the current account deficit (CAD) under control by lowering gas imports and also by bringing in more FDI of the kind BP brought in to partner RIL in the KG Basin. So while the decisions on raising equity caps on FDI, as recommended by the Mayaram Committee, can certainly be taken over the next few weeks, the fact that the government chose to focus on CSS sends a signal of its own.
It is likely that, with RBI support as well as global investors getting over the initial panic, the rupee will settle down and may well retract to the levels of a few days ago. In its latest statement, for instance, the Fed has made it clear the bond purchases will be lowered depending on how the US economy reacts—while the Fed is looking at 2013 US GDP growth of 2.3-2.6%, the IMF is looking at a 1.9% number; while the Fed is looking at 2104 unemployment of 6.5-6.8%, the IMF is looking at a 7.2% number. In which case, easing of QE3 may get postponed. The impact on India will be mixed—while cutting back on QE3 could reduce forex inflows, it will also soften commodity prices.
What’s important, however, is that with the CAD at current levels, and exports still not growing enough to take up the slack, the rupee continues to be the most vulnerable of all emerging economy currencies—just $4.4 billion of FII money, including debt and equity, moved out since the May 22 selloff and this brought down the rupee by as much as 7.5% against the dollar. With $20 billion of ECBs due for repayment this year and European bank balance sheets in trouble—most of India’s trade credit comes from them—funding the CAD will keep the rupee under pressure. While India clearly needs to find solutions to make exports more competitive—they continue to crawl despite the rupee depreciating while the renminbi is appreciating—short-run solutions have to be around bringing in more FDI by raising sectoral caps and by removing needless irritants such as those in multi-brand retail and aviation.
If this is not done and the rupee continues to be under pressure, this will worsen India Inc’s balance sheets as well as earnings—a 5% depreciation lowers Bharti Airtel’s FY14 EPS by 11.6% according to BoFA-ML, and R30,000 crore of debt has been added to India Inc’s balance sheet with a R5 depreciation since January 1. While this lowers India Inc’s ability to invest, the sharp hike in oil under-recoveries lowers the government’s ability to spend and the PSUs’ to invest. This lowers Sensex earnings which lowers FII interest … This vicious cycle is what needs to be broken. While a few big projects—and the railway corridor and the DMICDC cites come to mind—can break it, the government moving on clearing roadblocks to FDI will help revive flagging investor interest.