REFORMS

Toothless bite

Toothless bite The draft civil aviation policy has raised questions, as it did not clearly address the painful issue of a five-year 20-routes entry barrier for Indian airlines to fly abroad | Reuters

Government's reform announcements are yet to make an impact

  • Demand in the automobile sector, one of the largest contributors to manufacturing, is slowing down at the retail level.

From flying sky high to digging the earth deep, the Narendra Modi government has tried everything to project the image of 'change' in India. At the moment, the efforts seem to have cut not much ice. The government, however, is pushing for a number of reforms before the beginning of the winter session of Parliament. “Structural reforms to the economy continues,” said Finance Minister Arun Jaitley. “They should continue at a rapid pace.” He is confident of achieving 8 per cent gross domestic product growth in 2015-16.

The government policy mill, too, has been working overtime. Foreign direct investment norms have been relaxed in sectors like defence, rail infrastructure, construction development, insurance, pension, medical devices, white label ATM operations and investments by NRIs on non-repatriation basis. “Public investment has increased, FDI  has also considerably increased. Private sector investment is slowly picking up,” Jaitley said at the Resurgent Rajasthan Partnership Summit in Jaipur recently. “For the actions that the Centre and states are taking, there is a huge amount of public support and the onus on all of us therefore is to open our doors wide for those investments.”

The revenue department has been working overtime to formulate a 25 per cent corporate tax for the budget. Further fuelling hopes, Jaitley said rates of taxation should not be so 'onerous' or so 'aggressive' that it deters investors. “The India of 2015 is not the India of 1971,” he said. “For that matter, it is also not the India of 1991. The aspirational constituency which supports growth, which supports reforms and wants India to reform much faster, has increased.”

With the recent increase in FDI in the housing sector through the automatic route, developers are hopeful that the sector will see some revival. “The Reserve Bank has done a lot to sell bad loans in the highway sector,” said Amitabh Kant, secretary, Department of Industrial Policy and Promotion. “We do not want any businessman to come to Udyog Bhawan or the finance ministry; that is also the mandate from the prime minister,” he said at the annual general meeting of ASSOCHAM.

However, economists are viewing things differently. “FDI is not coming to India in a hurry. There are worries about things internally,” said Deep Narayan Mukherjee, senior director at India Ratings and Research, a Fitch Ratings company. The government had said that these reforms were meant to rationalise and simplify the process of foreign investment and to put more proposals on automatic route, instead of government route where time and energy of the investors are wasted. “Such initiatives are fine but why would foreign investors be interested when India is still in the top 50 nations in corruption index,” said Mukherjee.

In the past few months, some Rs.2,000 crore in FDI was announced by the government. Most of these investments are in the pharmaceutical, non-banking finance and manufacturing sectors. “The banking sector has done well in attracting FDI as things there are clear about corporate governance. These are clear signals on what directions government reforms are needed,” said Mukherjee.

A spate of announcements had also made it easier for foreign consultancy firms to become limited liability partnerships, giving more flexibility to transfer earnings to the parent company. The move is expected to have tax implications for these companies. “This alone is unlikely to bring in real reforms. Some valuations in Indian companies are already front-loaded with the expectation that the political-economic scenario will better,” said Ajay Bodke, chief portfolio manager, Prabhudas Liladher, a Mumbai-based stock broking firm.

According to Fitch Ratings assessments on the basis of profit and equity ratio, Indian listed firms are at 14, compared with 9 for Chinese companies. This pegs Indian companies with the promise of better earnings. The downside: this advantage is likely to vanish if reforms are not executed by next March.

In December, another crisis in the form of a rate hike by the US Federal Reserve is also likely. This has already been sending jitters down markets around the world. The US economy, which currently attracts the highest FDI in the world, is expected to continue to do so.

For India, the situation does not look that positive. “There is a slack in industrial sector to delay their capex cycle. But, large requirements in the infrastructure sector alone could restart growth with the government spending in roads and railways,” said S.P. Sharma, chief economist of Punjab Haryana Delhi Chamber of Commerce and Industry. “The USP of cheaper labour needs to go away and more focus is needed on research and development,” he said. “In the retail sector, the expectations are that the enthusiasm will continue in the e-tail space.”

The recently announced draft civil aviation policy has raised questions, as it did not clearly address the painful issue of a five-year 20-routes entry barrier for Indian airlines to fly abroad. The government has maintained a confused approach, with three open options—continue with the archaic rule, abolish it or restructure it. “Retaining any part of a barrier, be it in any form, would be quite pointless in any new policy that the government comes up with,” said Aditya Ghosh, CEO of budget carrier Indigo Airlines.

New entrants in the airlines business are seen sitting on the fence with a fraction of passenger share while bigger players with capital capture the market. “Airlines that have received no objection certificate to start operations have been waiting for six years or even more to get investments. What is more alarming is that in a year or two our airports will run out of space to allow any new airline,” said Kapil Kaul, CEO (India and Middle East), CAPA Centre for Aviation, an industry watcher.

In the mining sector, most reforms that have been announced by the government are yet to see any impact. A majority of the 33 schedule-II (operational) coal blocks that were auctioned are yet to be awarded to bid winners. However, the government is pushing the pedal decisively on reforms through executive actions. Recently, Coal and Energy Minister Piyush Goyal announced a comprehensive package to resuscitate the almost bankrupt power distribution companies in the country. Goyal had long meetings with bankers and distribution companies to firm up the terms of the package.

While Goyal had said that by 2017 India might not need to import coal, analysts are saying that Coal India, the national miner, will again fall short of meeting supply targets this year. Disinvestment plans of Coal India are on uncertain grounds after unions threatened to halt production if further divestment is done.

“No one has any interest in anything other than the Sensex,” said a Delhi-based investment adviser of a foreign bank, reflecting the sentiments of foreign investors. In 2015, foreign institutional investment of Rs.57,052 crore poured into debt instruments and Rs.19,336 crore into equities. Domestic institutional investors put Rs.61,791 crore in equities.

Manufacturing in India, which the government had tried to reform, is slowing down. Demand in the automobile sector, one of the largest contributors to manufacturing, is slowing down at the retail level. Automobile sector watchers said nearly 14 per cent of the sales growth had been from new launches in the past two months. “The demand growth this year would taper down to 6 or 7 per cent. Add to this, the drought situation in rural India,” said Abdul Majeed, auto industry expert and partner at PricewaterhouseCoopers India.

Rural markets account for a third of India's small car demand. Because of the deficit monsoon, delayed sowing of winter crops and rising inflation, this demand has slowed. An estimate is that while rural markets had an 18 per cent share of the automotive sales a year ago, this year they contributed just around 15 per cent.

The recommendations of the seventh finance commission and the one rank one pension announcement for defence personnel are likely to drive spending up in the near future. The troubles, however, are still looming and could result in market corrections and a weaker rupee till next February.

DESPERATE TIMES
* Foreign direct investment norms have been relaxed in 15 sectors, such as defence, rail infrastructure, construction development, insurance and pension
* The revenue department has been working on a new corporate tax formula
* Foreign consultancy firms can become limited liability partnerships, giving more flexibility to transfer earnings to the parent company
* Fitch Ratings assessments say Indian companies promise better earnings on investment. This advantage is likely to vanish if reforms are not executed by next March
* The recommendations of the seventh finance commission and the one rank one pension announcement for defence personnel are likely to drive spending up in the near future
* FDI is not coming that easy owing to internal worries. Corruption is still a concern for foreign investors
* A rate hike by the US Federal Reserve is likely in December
* Most of the 33 schedule-II (operational) coal blocks that were auctioned are yet to be awarded to bid winners
* Disinvestment plans of Coal India are on uncertain grounds after unions threatened to halt production
* Manufacturing is slowing down. Demand in the automobile sector is slow at the retail level

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The Week

Topics : #economy

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