Tagged #India


Measures Taken To Stem Rupee Fall

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IndusView, Thursday 29 August 2013 (London): The Indian government is taking steps to stem the fall of the rupee, which has lost about 20% of its value this year.

The Indian government has approved infrastructure projects worth $28.4 billion to revive the economy and boost the falling rupee. Finance Minister P Chidambaram said 36 stalled projects in oil, gas, power, road and railways sectors were cleared. The Reserve Bank of India (RBI) also unveiled plans to bolster the currency by lending dollars to state-backed oil groups. The central bank said it would use swap agreements to sell dollars to three companies, Indian Oil, Bharat Petroleum and Hindustan Petroleum, as part of a plan to fund oil imports.

A number of Indian banks have started increasing interest rates on non-resident Indian (NRI) fixed deposits with long-term maturities to attract foreign currency. Federal Bank, Axis Bank and IDBI Bank have joined Karnataka Bank and Dena Bank, who have already raised their rates for non-residence external (NRE) fixed deposits following the liberalisation of the same by the RBI.

"India’s secret weapon is its 25 million strong overseas diaspora who sent twice as much money into India last year than FDI and FII combined,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. "$70 billion in annual remittances by Non-Resident Indians (NRIs) provides India with a distinct advantage over other BRIC economies, which is expected to increase to about $80 billion this year with the rupee depreciation.”

India’s dependence on foreign capital is also high and has risen sharply. The current-account deficit soared to almost 7% of GDP at the end of 2012, although it is expected to be 4% to 5% this year. External borrowing has not risen by much relative to GDP—the ratio stands at 21% today—but debt has become more short-term, and therefore riskier.

"A cheaper rupee will also encourage exports and discourage imports,” said Rangar. "If investment and exports begin to surge again, business confidence will return; that’s when the rupee will strengthen.”

The rupee has lost about 20% of its value this year and is one of the world's worst performing currencies. India's currency has also been hurt by a range of other factors, not least the country's burgeoning current account deficit.

"The government needs to be more proactive,” added Rangar. "So far, all the actions taken have been to contain a crisis and not to prevent it”

India's current account deficit, which stood at 4.9% of the GDP in calendar year 2013, was the third highest in the world in terms of absolute numbers. At $98 billion, India's current account deficit in absolute numbers stood behind only the US ($473 billion) and the UK ($106 billion).

"A widening deficit not only puts a strain on the nation's foreign exchange reserves and but also indicates that it may need to borrow more money,” said Rangar. "That has triggered fears that India may not be able to trim its deficit.”

India imports almost 80% of its oil and there are concerns the higher prices will lead to higher inflation and a worsening of India's deficit.

The Wholesale Price Index, India's most closely watched inflation gauge, dropped to 4.7% in May on an annual basis, down nearly two-tenths of a percentage point from its 4.89% level in April. The broadly based wholesale price inflation reading, the lowest since late 2009, was well below market forecasts of a 4.9% rise.

A slowdown in India's growth rate - which has hit its lowest level in a decade - has also hurt investor confidence. International investors have withdrawn nearly $12 billion in shares and debt from India's markets since the beginning of June.

India's economic growth rate slipped to a decade low of 5% in 2012-2013 on account of poor performance of farm, manufacturing and mining sectors. It is projected to rise to 5.7% in the 2013 fiscal year and firm to 6.5% and 6.7% in 2014 and 2015, respectively.

Policymakers have consistently struggled to come up with steps that can convince markets they can stabilize the rupee and attract funds into the country despite extraordinary measures last month by the central bank to drain liquidity and action to curb gold imports and cut India's huge oil import bill.


Happy Independence Day!

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Happy Independence Day

from IndusView!


India’s Union Budget 2013: Assessment Criteria of Foreign Investors


India’s Finance Minister will be assessed by international investors on policy changes to increase foreign inflows, clarify tax laws and expand the country’s tax base, in his presentation of the Union Budget shortly after the latest gross domestic product (GDP) data is released today.

India's current-account deficit (CAD) has worsened since 2008 due to slowing exports and expensive oil and gold imports. It recorded a current account deficit of $22.3 billion in the third quarter of 2012, or 5.3% of GDP, the worst in a decade. That compares with less than 1% of GDP in the first half of the last decade.

"The Finance Minister has to steer the country away from the danger of being the first BRIC country to lose investment grade status via a credit downgrade,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. "He has a challenging task of revving a growth engine, that sputtered under his predecessor, with the fuel of more foreign capital and wider tax collections.”

"India’s current tax base represents fewer than 35 million, or a dismal 3% of its population,” said Rangar. "That contrasts the size of its middle class estimated to be 250 million people that’s expected to reach 600 million by 2030.”

India’s CAD is being financed through stable capital flows, according to India’s Harvard-educated Finance Minister P. Chidambaram. In 2012, Foreign Institutional investments (FII) totaled $10 billion and the country attracted $27.3 billion worth of Foreign Direct investments (FDI). Both combined represent $37.3 billion, which isn’t enough to feed the growing CAD.

On the other hand, annual remittances into India that currently fuel the world’s largest remittance-corridor, surpassed $70 billion in 2012, as NRIs took advantage of a week rupee and high deposit interest rates at Indian banks.

"India’s secret weapon is its 25 million strong overseas diaspora who sent twice as much money into India in 2012 than FDI and FII combined and more than net earnings from exports of software, business, financial and communication services,” said Rangar. "$70 billion in annual remittances by Non-Resident Indians (NRIs) provides India with a distinct advantage over other BRIC economies.”

"Cutting subsidies and privatizing public sector companies will only go so far,” said Rangar. "The Budget should make it seamless for Non-Resident Indians (NRIs) to use their remittances to invest in Indian company securities, mutual funds and other investment products and foster an increase in annual remittances into India.”

"India needs to attract more inward investment and better collect tax to fund the $1 trillion requirement outlined by the Prime Minister to build the country’s infrastructure over the next five years,” said Rangar. "Better infrastructure is critical to increase India’s GDP as it will shear waste and inefficiencies in agricultural and industrial output.”

To attract foreign investments, the government should best amend its controversial tax law and not impose tax with retrospective effect on overseas deals involving local assets. India has also said it may soon finalize the rules for a proposed clampdown on tax avoidance as it considers delaying implementation of a plan that also spooked foreign investors.

India is currently aggressively pursuing tax claims against multinational firms and has targeted several companies for tax audits on transfer pricing.

"The Indian tax man’s potential treatment of low cost intellectual capital work allocated by India to multinationals, as being a higher value service and therefore, taxable at higher rates, will give reason to multinationals to seek other jurisdictions where taxation is simpler and the cost advantages are as good, if not better than India,” said Rangar. "The tax man should focus its efforts to widen the tax base and therefore, increase revenue.”

India, currently the world’s tenth-largest economy, is vying to be among the top five by 2022, according to the London-based Centre for Economics and Business Research (CEBR).