Inflows down to $68mn last week, rupee falls to 53.8
A few months ago, when the government began its long-overdue reforms, the short-run emphasis had to be on getting the stock markets, and by implication, the currency markets back on track. Given the slowing economy and the resultant slippages in tax collections, it was obvious meeting fiscal targets wasn’t going to be easy—the Vijay Kelkar panel put the likely slippage on taxes at 0.5 percentage points of GDP for FY13 and a similar amount for expenditure shooting out of control. In such a situation, disinvestment offered perhaps the only way out for the government—there is likely to be a big slippage in the telecom receipt projections of R40,000 crore from one-time fees for ‘extra’ spectrum as well as for the forthcoming 2G auctions (http://goo.gl/qghIJ). While it is true the government has got nothing from disinvestment so far, the potential is large—there is the R40,000+ crore from the ITC/L&T/Axis shares held by SUUTI, there is the R17,000 crore offer made by Anil Agarwal for the government’s residual stake in Balco and Hindustan Zinc … The other reforms, like making direct cash transfers to cut the 30-40% or more waste in various subsidy schemes would take time, and it was not certain the government would be able to get Parliament to okay hiking of FDI limits in insurance and pension. An interview of BJP leader Yashwant Sinha in FE today confirms this view that the government’s legislative agenda is a next to impossible one.
For a while, when the government announced its reforms, it appeared investors bought into it. As compared to net FII outflows of $103 mn in April and $273 mn in May, June inflows were a mere $26 mn. July saw inflows of $2 bn, August $1.7 bn, but it was in September that flows jumped to $3.8 bn. Not surprisingly, the rupee, which was 50.88 on April 2 fell to 55.5 by the end of August, before recovering to 52.9 by the end of September. By October, however, you could tell that FIIs were beginning to get a bit restive, and the worsening political climate hasn’t helped convince them about the Opposition being willing to play ball as far as passing critical legislation is concerned. In the first week of October, net FII flows were $1.1 bn, but this fell to $654 mn the following week, and to just $68 mn in the week ending October 19. The rupee has, as a result, resumed its downward movement, to 53.8 yesterday. Whatever the impact of that on exports—a slowing global economy has meant the traditional boost may be a while in coming—the impact on oil deficits has been immediate with oil under-recoveries rising. In such a situation, unfriendly land acquisition bills, or new clauses giving the government blanket rights to penalise firms as in the forthcoming 2G auctions can’t be a great idea.