Fix CAD problem with FDI
Consumers stand to benefit.
Get cracking on the Mayaram Committee and reduce curbs on FDI.
July 11, 2013:
The Government is keen to promote economic reforms into the country, the objective being twofold – ease the widening current account deficit (CAD) and spur economic activity. The Secretary, Department of Economic Affairs, submitted a discussion paper last month recommending a hike in foreign direct investment (FDI) caps in various sectors including defence, telecommunication, banking, insurance, single and multi brand retail, aviation and media.
In the wake of widening CAD and depreciating Rupee, the Mayaram committee's recommendations are indeed a welcome step.
Foreign investment in India is governed by the FDI policy, which provides for ceilings on foreign investment in certain sectors with no caps on other sectors. The Mayaram Committee's recommendations should help in containing the ballooning CAD. Current account is the difference between a nation's total exports of goods, services and transfers and total imports. India relies heavily on foreign inflows to finance its CAD; hence, a decline in gross FDI inflows last year ($ 36,860 million in 2012-13 against $ 46,556 million during 2011-12) worsened the CAD. A hike in sectoral caps should increase FDI and reduce the deficit. The economic reforms of 1991 gave a major boost to foreign investments in India; however, restrictions on FDI in India have deprived India of its fair share of foreign investment compared with its emerging peers.
The need for outward orientation
Unlike FII funds, FDI is relatively permanent capital and hence creates a long-term positive impact on the economy. Many global and well known players in insurance, aviation, retail and asset reconstruction sectors are waiting on the shores, expecting the Government to further liberalise FDI norms.
These sectors require huge investments for creating quality infrastructure, and hence easing FDI caps here will strengthen the economy. Foreign capital in retail will also lead to better infrastructure, latest technology and reduced prices, which will translate into benefits for end consumers. FDI will also aid the struggling telecom industry in rolling out new infrastructure and help local players to sell their stake and reduce high debt burden.
When foreign players commit large chunks of funds to India, they expect to have a greater say in the control and management of investee companies; a lower FDI cap restricts foreign investors to exercise control. An uncertain regulatory regime and judiciary only adds to their woes. Hence, easing FDI caps and other regulatory hurdles is the need of the hour.
In the past, FDI has been an integral part of India's growth story. Perhaps, if implemented positively, these recommendations along with other policy initiatives could prove to be a boon for the present state of the Indian economy.
(This article was published on July 11, 2013)
Modi does it TIME and again!
July 11, 2013:
Chief Minister of Gujarat Narendra Modi has yet again hit the cover of the TIME magazine which has given him a thumping write-up. Remember, the magazine enjoys a readership of 25 million and to make it to its cover is no mean feat.
Under the title, "Modi means business — But can he lead India", it extols the achievements of Modi in such glowing terms as to make any Indian reader and wonder whether it is really all about a State or a politician in his own country. It talks about the State's phenomenal success story in all-round development, its emergence as the auto-hub of India with an expected capacity of 700,000 cars in 2014, the 24-hour uninterrupted power supply guaranteed to both business enterprises and farmers in the field, and a streamlined and efficient bureaucracy.
What the run-of-the-mill political bigwigs would find most galling is about the State being free from corruption and about the family of Modi being not at all visible.
The TIME's comment that Modi "does not put his faith on public display" and that, but for a picture of Swami Vivekananda, he has no religious icons in his office, must be a revelation not only to 'secularists' for whom Modi is the whipping boy but to the general public as well. The commentary does not even once make any reference to the 2002 post-Godhra disturbances.
INCREDIBLE
Its punch line is: "…When others think of someone who can bring India out of the mire of chronic corruption and inefficiency, (and) of a firm, no-nonsense leader who will set the nation on a course of development that might finally put it on par with China, they think of Modi." This is incredible tribute by any standards. There is no point in being churlish or petty in reacting to the praises repeatedly heaped on him, not only by TIME, but also by some other publications of international repute. They stand out all the more prominently in the light of the fact that no other Chief Minister has been considered worthy of such recognition.
They can only come out of some deeply felt compelling urge to write about him. Otherwise, there is no reason why when there is so much happening in the entire world and so many other issues are there to be taken note of, these magazines should focus so much on the leader of a State in India, and give him so much space so often.
This gives a measure of the extent of the awe and admiration inspired by Modi.
There is no doubt that all other political leaders, particularly those outside the Bharatiya Janata Party (BJP), or, perhaps, even including them, will find this most discomfiting! Their discomfiture must be all the more acute for the simple reason that it is impossible to dismiss these laudatory articles as politically motivated or stemming from a saffron mindset.
UNDISPUTED ABILITY
They are by analysts and observers who have no political axe to grind vis-à-vis Narendra Modi nor anything to gain by propping him up. They are by persons with a deep comparative grasp of world affairs and political personalities whose critical faculties are sharp and who are not afraid of calling a spade a spade.
So, they would not have built up Modi in such an eloquent and effusive manner without going deeply into every relevant factor relating to his performance and without cross-checking it with different sections of the opinion from grass roots to the top echelons of officialdom.
The question must still be asked: Where does Modi go from here? It is indubitable that, TIME or no TIME, he is, on all accounts, the most dynamic and effective public functionary today. It must be borne in mind at the same time that he is home-brewed and rough-hewn and has so far shone on his home ground where he knew his way about and the ambience was favourable for pulling off the Modi magic.
The complexities, chicaneries and machinations of national politics are quite something else. Maybe, if he were to lead a Government composed of the BJP with an absolute majority in the Lok Sabha, he will be able to live up to the reputation he made in Gujarat.
But if it were a coalition in which he is liable to be pulled hard in different directions by its ruthless and rapacious constituents, the prospect is not that clear. Even so, I hope that in the coming elections, the people will opt for a change from the present effete dispensation, and Modi will get a chance to show his mettle.
(This article was published on July 11, 2013)
Welcome to bank licensing Derby
The Department of Post looks a winner in a race involving 26 new bank licence applicants.
The Department of Post looks a winner in a race involving 26 new bank licence applicants.
July 11, 2013:
On July 1 26 horses moved up to the starting line for the bank licensing Derby.
The Budget for February 2010 indicated that the process for entertaining applications for new private sector commercial bank licences would be initiated.
The consultative process took three years before the Reserve Bank of India (RBI) announced the final guidelines in February 2013, and then another four months for submission of the applications.
The fact that, on this occasion, there were only 26 applications, as against hundreds of applications on the earlier two occasions in 1993-94 and 2002, is erroneously interpreted as waning interest in applying for bank licences. On the earlier occasions, it was much easier to weed out the less serious applications.
In the present occasion, while there are fewer applications, almost all are serious contenders.
Scrutiny of licences
Indications are that the internal processing will take three or four months and after the External Committee has tendered its advice, the licences would be issued by March 2014. There are concerns about the timeframe for the licensing procedure. The initial internal scrutiny in the RBI of all the applications should be undertaken against the backdrop of the various criteria set out in the final guidelines and without a preconceived number of licences which are deemed to be appropriate.
Role of External Committee
Given the impending change of guard at the RBI, it would not be desirable to constitute the Committee before early September 2013. In any case, the internal scrutiny will go on until October 2013. Furthermore, discussion with other regulators and agencies concerned would take some time.
It would be desirable to have the external committee headed by a former Governor, with members having experience in central banking, commercial banking, administration, legal and economics.
The Committee should have the opportunity to examine each of the applications before them.
It will take at least till March 2014 for the External Committee to tender its advice and the RBI top management to complete its assessment. Political economy compulsions would warrant that in the best interests of transparency of operations, final decisions are taken after due deliberation, say, in June-July 2014.
There should not be a preconceived decision that the number of licences granted would be four or five or, say, nine or ten. Given that one half of the population is still not covered by the banking system and the need to increase the penetration of banking, the number of licences approved should be determined by the number of applications which fully meet the criteria set out in the guidelines. A further thought is that acceptance of applications should be on tap so that there is not much hoopla over the scrutiny of applications.
Include industrial Houses
The Committee on Fuller Capital Account Convertibility (2006) recommended that industrial houses which meet all the criteria set out in the guidelines should be considered for granting licences.
The Finance Minister, in February 2010, while indicating that licences for new private sector commercial banks would be considered, had said that this would include industrial houses.
Attempts by some analysts to debar industrial houses, should be peremptorily dismissed — in fact, such analysts are fighting yesteryear's battles.
We have long since crossed the Rubicon, since industrial houses have successfully operated in insurance, non-bank finance companies and mutual funds and there is just no point in further sterile debate.
Pleas by applicants for relaxation of the final guidelines should be dismissed. Moreover, care should be taken to ensure that any slippages in meeting the criteria and the regulatory framework should invite withdrawal of the in-principle approval.
This would also require that earlier generation banks be subject to the same criteria such as minimum capital, reduction in the percentage of ownership by the sponsor and opening of branches in rural areas.
In fact, setting up of token 'tin sheds' in rural areas should be subject to strictures. Efforts by banks to attain financial inclusion should be assessed by meaningful performance and not attainment of paper targets.
While the media has been active in commenting on the 26 applications for new bank licences it has, by and large, not focussed on the application by the Department of Post (A notable exception is 'Post Bank of India', The Hindu, July 5).
The Department of Post has been, for quite some time, articulating the need for the postal system to be given a full-fledged bank licence.
What the media seems to have missed is that the Department of Post has actually applied for a private sector bank licence.
India Post Bank
The new entity would no doubt need to be incorporated, but it would imply that the Government will have a minority stake.
The Department of Post will need to set up a 100 per cent sponsor-owned (that is government-owned) Non-Operative Financial Holding Company, and the sponsor will be required to have a 40 per cent stake in the India Post Bank which would be locked in for five years; thereafter, the sponsor would need to reduce its share in the Bank.
The private holding would best be spread over a number of institutions rather than one institution that would have a controlling interest. After a few years, the new Bank would need to list itself in the stock market and widen its ownership.
The India Post Bank, as a private sector unit, with only 10 per cent of its offices operating as a bank, would have 15,000 branches.
The total number of post-offices are 1,55,000 and, in the initial stages, the bulk of offices would need to work as extension counters of one of the branches. In due course, the larger of these extension counters would become independent branches.
Since 90 per cent of the post-offices are in the rural areas, a full-fledged India Post Bank would provide a major thrust to the avowed objective of financial inclusion.
Thus, the granting of a bank licence to the Department of Post should make it the out and out winner of the private sector bank licensing Derby.
If there is one outstanding initiative emerging from the July 1 list of applicants for new private sector bank licences, it relates to India Post.
Could this be a precursor to a shift in the immutable policy of majority ownership of public sector banks?
(The author is an economist. blfeedback@thehindu.co.in)
(This article was published on July 11, 2013)
Difficult to predict rupee fall reversal: Subbarao
Reserve Bank Governor, D Subbarao
Indore, July 11:
Attributing the decline in Rupee to global factors, the Reserve Bank Governor, D Subbarao today said it would be difficult to estimate when the situation will improve.
"The rupee depreciation over the last six weeks has been because of global factors .... It is difficult to say how long that effect will persist because it is factors beyond our control," he said here.
The Rupee has declined by about 9 per cent in the past three months and had touched an all time low of 61.21 to a dollar earlier this week.
It has, however, recovered to sub-60 level today following remarks of US Federal Reserve Chief Ben Bernanke that the stimulus programme would stay in place for some time.
On the possibility of rate cut, Subbarao said he will assess growth, inflation and the external situation while taking a view on interest rates in the upcoming policy on July 30.
The CAD remains high, he said.
The CAD hit a record high of 4.8 per cent in the last fiscal.
In view of declining value of rupee, fears of inflation and high Current Account Deficit (CAD), the RBI left interest rates unchanged during last policy review in June.
Earlier, during an outreach programme in Khurda village, Subbarao told the gathering that the central bank would accord priority to controlling inflation which still remains "high".
RBI's efforts to contain inflation over the years have yielded fruit with the WPI inflation declining to 4.7 per cent, the lowest in over three years. However, retail inflation stood at 9.31 per cent in May.
The apex bank would look at supporting growth but would make efforts to keep inflation low.
(This article was published on July 11, 2013)
Banks seek lower tenure for non-resident deposits
R. K. Kamat
Mumbai, July 11:
To attract more dollars into the domestic market, bankers have requested the Reserve Bank of India to cut the minimum period of investment in Foreign Currency Non Resident (FCNR) and Non Resident External (NRE) account to six months from one year now.
FCNR deposits, which have a minimum tenure of one year and a maximum of five, can be opened by overseas Indians with banks in India.
NRE deposits are also opened with banks in India by non-resident Indians who can convert their dollar investments into rupee at the time of investment.
"We have requested that if the minimum investment period on FCNR and NRE deposits can be reduced to at least six months, it will help us bring some more dollars into the country," said K.R. Kamath, Chairman and Managing Director, Punjab National Bank.
In the first two months of the current fiscal, FCNR(B) deposits in the banking system nudged up by just $207 million to $15.395 billion as at May-end 2013. FCNR deposits can be opened in US dollar, euro, British pound sterling, Canadian dollar. Australian dollar, Japanese yen, Swiss franc, New Zealand dollar, Danish krone, and Swedish krona.
India to ask US to drop immigration Bill in return for freezing go-local policy
The concerns of both sides were discussed during the recent visit of the US Secretary of State John Kerry to India.
New Delhi, July 11:
In what is being seen as a quid pro quo, India will push the US Government to scrap the proposed immigration Bill in return for putting a freeze on the go-local manufacturing policy for electronic products.
While the policy to encourage local manufacturing can hurt US electronic majors such as Cisco and Hewlett Packard, the immigration Bill will have a negative impact on Indian IT companies.
According to a top Government official, the concerns of both sides were discussed during the recent visit to India of the US Secretary of State, John Kerry, with the US side linking the two issues. "The US wanted us to address the concerns of American business if we wanted our concerns on the treatment of Indian businesses in the US immigration Bill to be heard," the official said on conditions of anonymity.
The US industry had been lobbying against the go-local policy under which companies, government institutions and telecom players would have to buy at least 30 per cent of their electronics and hardware requirements from producers that have manufacturing facilities in India.
The policy, called the preferential market access, also stipulated that manufacturers must ensure that value addition happens locally and not just assembling of products. While the IT Ministry wanted to go through with the policy on security grounds, the Government last week put it on hold after the Prime Minister's Office intervened. Having addressed the US business' concerns, Prime Minister Manmohan Singh could now take up the concerns of the Indian IT companies with President Barack Obama during his visit to the US in September.
The US Senate has passed a legislation that increases the cap on H-1B visas from 65,000 to 1,10,000, but with restrictive clauses that hurt Indian firms such as Infosys and TCS. If the Bill becomes a law it will restrict a company with more than half its workers on H-1B from applying for more visas from the year 2016 or pay a steep fee of $10,000 per visa.
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