US consumers have started to re-leverage once more. Consumer credit has started growing at a pace that is faster than growth in retail sales. Question, however, is can this be sustained when the job data is much less optimistic. As data reveals, underlying the improved employment data is vast number of workers opting for part-time employment in the absence of full time jobs. Also, the number of discouraged workers is still very high, which ensures that the actual unemployment rate is rosier than it is in reality.
The old habit seems to have come back, even when the conditions are not conducive enough. But is this sustainable? Is the US economy just a few shocks away from getting back to recession?
Today's decision to hike FDI limits in various industries has been widely hailed by the industry as much needed reform measures.
It seems that reform has become a much abused term in India. Even a routine policy decision is being touted as reform, decibel level rises and people become excited.
There’s no doubting, of course, that the decisions to raise the FDI limits are positive. But are these game changers? Hardly. These decisions make for a good headline. But if one cuts through the clutter, one would understand the lack of substance.
Having dealt a potential body blow to India’s finances by introducing the Food Security Bill through ordinance route, this decision seems to be more of a ploy to divert the criticism and gain some brownie points in the process. Ironically, the day these measures were announced, Posco announced their pull-out of their USD 5 billion project in Karnataka.
Fact is, higher the fiscal deficit, higher will be the CAD and greater will be the headache in trying to finance the CAD. As a result, every inflow of non debt creating FDI will feel like water in parched land. To that extent these decisions make immense sense. But can these make material difference? Does not seem so.
Take the example of hiking FDI limit in multi brand retail. The decision to allow upto 49% of FDI through automatic route seems to suggest that this will lead to a stampede by potential investors. Unfortunately, after the sector was opened up to foreign investment in September last, the extent of control in the Indian operation was least, if at all, of an issue for the foreign retail biggies. The inherent foolish clauses in the then devised FDI policies in multi brand retail were of concern. Not surprisingly, there has not been even a single letter of interest, leave alone application over the last ten months. Unless these road blocks are effectively addressed, such cosmetic changes are hardly going to impact.
Come to think of it, hike in limits or approvals through automatic route would hardly matter for those global investors who have not yet entered India. This will only be of interest to those who are already in India and see the possibility of having more control on their Indian operations. To that extent, the decision to hike 100% for telecom would likely see inflows from the already entrenched companies who would want to consolidate their position. It is also imperative to have much easier rules for mergers and acquisitions to help in the consolidation process.
Even in case of defense industry, the decision to allow FDI above 26% through FIPB (non-automatic) route for those companies offering state-of-the-art technology may not meet with much success unless such companies are allowed majority stake in the Indian company. In fact, attracting high end technology into India would require much more than 26% ownership.
According to Ernst & Young, the suggested the new measures could attract up to $10bn of investment into India over the longer term. This figure in itself is an indication that these policies are not game changers.
Fact is, India is not a great place to do business. Not for nothing has FDI inflows been going downs. The need to the hour is for the government to showcase their concerted effort to remove the structural impediments holding back the economy. Only this can reverse the dipping business confidence and slowly set off a virtuous cycle of growth.
Rarely does one come across a government so unsure of itself yet itching to move and, in the process, botching up big time. Two recent developments drive home the point.
First, the decision to open up multi-brand retail trade to foreign investors. In an effort to forcibly showcase the fact that the government was not gripped by policy paralysis, they gave life to the policy that allowed majority share holding to foreign companies in retail trading in India. However, given their inability to think through (and at the same time appease the nay sayers) they put in such irrational conditionalities that none of the global majors evinced any interest in investment (even after nine months have passed since the trumpeted path breaking decision) save for seeking a few clarifications now and then. The government might have liked to believe that the attraction of the Indian economy is beyond doubt and the opening up of retail trade will lead to a stampede by the global biggies. On the contrary, however, there was a deafening silence – as the investors can only see a slowing economy mismanaged by a rudderless government.
As the government’s monumental inefficiency has resulted in historically highest level of CAD, financing of which is becoming extremely difficult with each passing day, the desperation to get FDI inflows to ease the pressure has now resulted in the government having to eat a humble pie. There is now thinking within the government that the restrictions need to be diluted to get the investments flowing.
Then the now-on now-off ordinance on food security bill. For the ruling UPA government, this is crucial to their dream of getting a shot at forming the third successive ruling government. However, with the budget session of the parliament being adjourned sine die with virtually no business being conducted save for passing the finance act, the government had been mulling the ordinance route to make food security bill a reality. However, given the muddled thinking within the government, they have announced promulgation of ordinance a multiple times only to chicken out later at the thought of facing major opposition. However, with the rising possibility of the opposition parties bringing in enough roadblocks to delay the implementation if the discussion takes place during the monsoon session of the parliament which is scheduled to kick start soon, the jittery government finally went ahead and got the ordinance done so that they have enough time to set the ball rolling before the election rolls in. This is another instance of reality winning over propriety, never mind the economic cost of such a move.
I have been an avid blogger. However, regulatory requirements, post my new assignment, has resulted in me taking a break. Wait till I am back.