FDI in retail is a good start and will help markets down the line
The opening up of the Indian retail sector to the world players by allowing 100% FDI in single brand retail and 51% FDI in multi brand is a sign of more forced reforms to come. The issue of FDI in retail is a long pending one and the government did not act on it earlier due to political compulsions when it was supported by the Left and due to more pending issues of facing a credit crisis in 2008 and addressing scams in 2011. On a long term basis the opening up of FDI in retail is positive for both inflation and the Indian Rupee (INR) as global retailers look to set up shop in India.
The government was forced to take the decision of opening up of the retail sector due to a) the INR depreciating by 15% against the USD and b) inflation staying at over 9% levels for six consecutive months. Opposition from a key ally in West Bengal did not deter the government when it announced the higher FDI in retail. Money will not rush in to India on the back of the announcement but it is a positive reform measure under forced circumstances.
The government is also considering allowing FDI in the Airline sector. The airline sector is facing difficulties due to structural issues in aviation in India and two large carries Air India and Kingfisher Airlines are bankrupt, and need a heavy dose of capital for survival. Again the FDI in the airlines sector has been an issue for many years with the government even blocking a proposed joint venture between the Tata group and Singapore Airlines.
The FDI proposal for the Airline industry is again a forced policy measure as a healthy airline industry is crucial for the infrastructure of the country and if three of the largest Airlines (Jet, Air india and Kingfisher) are in the red, it does not bode well for the aviation in India.
In related currency developments, the government increased the FII limit for government bonds and for corporate bonds by USD 5 billion each, taking up total FII limits to USD 15 billion for government bonds and USD 20 billion for corporate bonds. The pervious limits were almost fully utilised and there was more demand from FII’s for investment in Indian debt, despite a weakening currency. The limits will get filled up gradually as global risk aversion continues to weigh on sentiments but it will get filled up all the same and this is positive for the INR.
The government needs to address two sectors that are in dire straits, the oil industry and the power industry. The government is not allowing the pass through of higher costs to the end user and this is creating deep holes in the government’s pocket, as it has to ultimately bear the burden of the subsidies. Indian oil marketing companies have lost almost Rs 65,000 crores in the first half of this fiscal on the back of selling fuel below cost.
The power sector is in deep trouble with SEB (State Electricity Boards) suffering losses, as they are not allowed to sell electricity at cost to the end user. The SEB losses are estimated at around Rs 100,000 crores as of October 2011. The poor balance sheets of SEB’s are hurting power sales as power producers are reluctant to sell power to SEB’s as they do not get paid. As a result even if power is available in plenty, there is an artificial shortage of power as SEB’s are not able to source power at cheaper rates.
The end result of subsidies is the government’s fiscal deficit going higher than projection leading to rise in borrowing costs. The government’s fiscal deficit for 2011-12 is expected to exceed budget estimates of 4.6% by 1%. Bond yields have risen by 60bps on the back of higher than expected fiscal deficit.
Key policy reforms in fuel and power sectors will go a long way in adding to the forced reforms in the retail and aviation sectors. However until then any reform is welcome.