India Policy Freeze Saps Funds as Greek Fallout Risk Rises
Posco, the world’s third-largest steelmaker, took seven years to gain permission to build a mill in India, only to have the environmental approval suspended by a tribunal in March.
Bahrain Telecommunications Co. (BATELCO) may sympathize after selling its share of mobile-phone operator STel Pvt. following the Indian Supreme Court’s revocation of 122 licenses in a corruption probe. Star India Pvt. Ltd., a unit of New York-based News Corp., waited even longer than Posco, finally exiting an eight-year television channel venture after the government failed to relax rules on news media ownership.
The reversals reflect policy paralysis in Prime Minister Manmohan Singh’s administration that leaves India risking deeper damage from any global crisis now than it experienced during the 2008-09 turmoil. A Greek exit from the euro could see growth in Asia’s third-largest economy careen to a rate unseen in a decade, according to Bank of America Merrill Lynch. Morgan Stanley sees 59 percent odds that the rupee, already Asia’s worst performer in the past year, will weaken further against the dollar.
“India doesn’t have time on its side,” said Chetan Ahya, a Singapore-based Morgan Stanley analyst ranked one of the top two India economists by Asiamoney magazine each year from 2001 to 2010. “Capital flows which have been funding its current- account deficit are now slowing significantly.”
A slump in economic growth has increased the urgency of pulling in foreign capital. Gross domestic product rose 5.3 percent last quarter from a year before, less than all 31 estimates in a Bloomberg News survey, a government report showed today. By comparison, India averaged an annual expansion rate of more than 8.5 percent over the six fiscal years to March 2011.
Overseas investors’ disenchantment makes it tougher for India to lure enough foreign currency at current exchange rates to pay for its excess of imports. India has foregone potential investment from overseas insurers, pension funds and retailers including Wal-Mart Stores Inc. in the past year. Singh’s efforts to lift barriers were rejected by his coalition allies.
The gap in India’s current account, the broadest measure of trade, is forecast at 3.23 percent of GDP this year, its second- worst reading in International Monetary Fund data back to 1980. That would exceed the shortfall Singh contended with as finance minister in 1991, when India was on the brink of default on $84 billion of overseas debt.
“It is now make or break time for the government,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “The inability to take the right economic decisions” has eroded the nation’s economic fundamentals, she said.
The rupee has tumbled 20 percent in the past year, the most among 11 Asian currencies tracked by Bloomberg, and reached a record low against the dollar on May 24. It was at 56.2325 per dollar yesterday in Mumbai. Morgan Stanley’s “FX probability analyzer” on May 30 estimated a 59 percent chance it will reach 57 in the coming three months, with an 18 percent risk of hitting 60.
India’s current-account gap has left its currency bearing a greater impact from an investor exit from riskier assets as Greece prepares for its second general election in two months on June 17. A disorderly Greek exit from the euro would send growth in the fiscal year through March to 5.5 percent, Indranil Sen Gupta, a Mumbai-based economist at BofA Merrill Lynch, wrote in a May 24 report.
Capital inflows have probably already slowed to a $40 billion annual rate, from as high as $55 billion in the fiscal year that ended in March, according to Ahya at Morgan Stanley.
The slowdown in investment is compounded by difficulties companies face in getting government approvals. ArcelorMittal, the world’s largest steelmaker, has waited more than six years to get land for projects. Last month, the Luxembourg-based company’s India-born Chief Executive Officer Lakshmi Mittal called for greater transparency in mining-rights allocation.
A parliamentary committee in India proposed banning land purchases by the government on behalf of private companies, making it harder to acquire sites. Posco (005490) has been trying to build its $12 billion steel mill in eastern Odisha state since 2005. Posco spokesman Vikas Saran declined to comment on the delay.
In the retail industry, Singh last year shelved a plan to allow Wal-Mart and other foreign companies to buy majority stakes, after opposition from his own coalition ally. A proposal to raise the foreign investment limit to 49 percent in local insurers has been pending in parliament since 2008, while a plan to open up pension funds was dropped last year. India doesn’t allow overseas investment in retirement funds and has capped the insurance sector at 26 percent.
‘Respond and React’
In an interview with Bloomberg in December, Singh said he’ll succeed in letting foreign companies buy majority stakes in Indian retailers after the regional elections this year.
While democratic debate slows decision making in India, policies, once implemented, are put in place for the long term, said Satish Misra, a political analyst at Observer Research Foundation, a policy-research group based in New Delhi.
The government has pledged to keep up its campaign for greater economic opening, and Finance Minister Pranab Mukherjee said in parliament May 16 that the nation’s “growth story has not come to an end.” He said that “despite differences, despite bitter fighting amongst ourselves, when the situation demands, we respond and react to it -- that is the strength.”
Need for Progress
“Policy makers obviously understand the need to show some signs of progress in structured reforms,” said Leif Eskesen, Singapore-based chief economist for Southeast Asia and India at HSBC Holdings Plc. “It is ultimately what is needed to ensure that the medium-term growth story is intact.”
For now, policy makers may have more immediate needs, such as quelling the rupee’s slump. The central bank curbed trading in currency derivatives this month to rein in volatility and moved to boost the supply of dollars by cutting the amount of overseas income that companies can retain in foreign currency to 50 percent from 100 percent. India’s foreign-exchange reserves have dropped about $28 billion since the end of October, to $256 billion as of May 18, according to data compiled by Bloomberg.
‘Low’ External Debt
For Indian companies, the weaker rupee has pushed up the cost to repay foreign debt after dollar loans more than doubled to $253.75 billion since the end of 2007. Even so, at 16 percent of GDP, private-sector external debt is “relatively low,” according to Moody’s Investors Service. Sovereign foreign- currency debt amounts to 5 percent of GDP, according to the ratings company.
“Continued balance-of-payments volatility will be less damaging than in 1991, when low reserves and a widening current- account deficit prompted India’s last balance of payments crisis,” Moody’s analysts including Atsi Sheth in New York wrote in a May 28 note.
Short of a payments crisis, the rupee’s decline has constrained the Reserve Bank of India’s ability to shore up growth by lowering interest rates. The slide threatens to push up what’s already the highest inflation rate among the BRIC nations, at 7.23 percent.
Goldman Sachs Group Inc. boosted its estimate for the benchmark wholesale price gauge to a 6.5 percent gain for the fiscal year that began April 1, from 5 percent previously. Tushar Poddar, a Goldman economist in Mumbai, now sees the RBI cutting interest rates by half a percentage point in the final three months of 2012, instead of the 75 basis points previously forecast.
The RBI has blamed infrastructure bottlenecks for contributing to the nation’s price pressures. Inadequate roads, ports and power plants, and corruption are major obstacles to doing business in the nation, according to the World Economic Forum. India placed 86th in the forum’s 2011-2012 global infrastructure ranking, lower than Cambodia and Sri Lanka.
“The government may promise a lot but the fact is that there are no reforms,” said Walter Rossini, a Milan-based fund manager who oversees about $260 million of Indian assets at Aletti Gestielle SGR SpA. “Growth prospects are more and more worrying.”
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