The election has ushered in a new government, a new sense of optimism and an expectation that India will get back to the economic growth trajectory it deserves. Amid high expectations, the to-do list is quite long — from requisite reforms in areas such as agriculture, manufacturing, the financial sector and public sector to foodgrain management, goods and services tax, tax-base expansion, FDI policy, etc. Here, I will focus on the most urgent financial sector reforms that the new government should tackle.Financial savings rate: One of the biggest challenges lies in resurrecting our financial savings rate, which has slipped to around 8 per cent in FY12, compared with an average of 10.8 per cent during 2000-10. Financial savings are the most productive form of savings for the economy due to their high multiplier effect. They are especially relevant for a capital-deficit nation such as India. The fall in financial savings has meant an increase in the physical savings rate. So much so that higher physical savings (like in gold) are mere transfers to the rest of the world — we are converting a financial asset (savings) into a financial liability (current account deficit).Development of pension funds: Currently, total retirement assets in the US are close to $23 trillion, or almost 1.5 times its annual economic output. Moreover, 67 per cent of US households reported that they had employer-sponsored retirement plans, individual retirement accounts, or both in May 2013. In contrast, our pension fund assets are tiny and mostly cover the organised sector, which is a small part of our workforce. Clearly, the pension fund industry should be developed. What makes it unique is that it manages very long duration assets and is, thus, well positioned to fund some of India’s long-term infrastructure needs.Financial inclusion: Unfortunately, while higher financial literacy and inclusion have been explicit policy goals, the results have been less than satisfactory. According to the World Bank Findex Survey (2012), only 35 per cent of Indian adults had access to a formal bank account and 8 per cent borrowed from the banking system over the year. Only 2 per cent used an account to receive money from a family member living in another area and 4 per cent used an account to receive payment from the government. A new look and thrust to this area is critical. Better financial literacy and regulation of distribution: The most important task here is to ensure that the end consumer is aware of the financial products that match his needs but, more importantly, is educated about the risks and benefits of each product to make a well-informed decision. Spreading financial literacy will increase financial savings and improve financial inclusion. Distribution of financial products has become a tough business. It is imperative that distributors earn a decent return on their effort, but they should also be accountable for the quality of sales. Development of the bond markets, especially corporate bonds: A vibrant corporate bond market ensures that funds flow towards productive investments and market forces exert competitive pressures on lending. While India boasts of a world-class equity market, its bond market is still relatively underdeveloped and government-dominated. A lower fiscal deficit, the addressing of stamp duty issues and broadening participation base in bond markets are required. Finding funding sources: The new government needs to find funds for India’s $1-trillion infrastructure need. It’s imperative to develop innovative funding strategies to meet this goal. Realistically, the majority of the funding will have to come from external sources, given the state of the Indian bond markets and a banking sector plagued with rising NPA ratios. In this context, issuing quasi-government guarantees and partially subsidised forex covers (as in the case of foreign currency non-resident deposits last year) can attract FDI and FIIs to the infrastructure industry. Banking reforms: Like other developing economies, India too is a bank-dominated financial sector with rough estimates that commercial banks account for almost 60 per cent of total assets in the financial system. But, now, how should the Indian banking sector evolve to meet our financial inclusion goals, while ensuring adequate funding for our growth needs? The answer lies in banking reform and opening up to innovative business models with access to distinctly new pools of capital. Bank consolidation needs to be pushed through, with the option of selling some of the PSU banks to private players.A supporting legal framework for the financial sector: There are two important focus areas for this. The institution of a resolution mechanism for failing firms and our regulatory architecture. The scope of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act should be expanded to enable timely recovery and resolution of claims by all institutional lenders. Our legacy regulatory framework has exposed gaps, such as the Saradha chit scam. Real estate products, which account for a lot of retail money, still don’t have regulatory oversight. Some of the Justice Srikrishna Committee suggestions on financial legislative reforms may be considered.It is well recognised in economic literature that an efficient and developed financial infrastructure leads to increased economic growth by improving the efficiency of allocation and utilisation of funds. As RBI governor Raghuram Rajan once mentioned, “India’s financial system holds one of the keys, if not THE key, to the country’s future growth trajectory.” The new government needs to remember this while trying to ‘reboot India’ and restore growth momentum. (This story was published in BW | Businessworld Issue Dated 16-06-2014)
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The BSE Sensex rose more than 1 per cent on Friday (23 May) to become the best performing equity market in Asia-Pacific for 2014 in dollar terms, on continued hopes the incoming Narendra Modi government would unveil substantial economic reforms. Gains were also helped as State Bank of India surged after reporting bad loans fell in January-March, sparking a rally in other state-run lenders. Modi will be sworn in on Monday (26 May), ushering in the new Bharatiya Janata Party government, and investors will first focus on his cabinet appointments, especially the finance ministry portfolio. The administration would then need to unveil a new budget by early July. Still, not all analysts are as optimistic. Deutsche Bank downgraded Indian stocks to "neutral" from "neutral/overweight" relative to other global emerging markets, saying valuations, appeared "very stretched." "Earning multiples look a little stretched for short term. July budget would be the next check point for this rally," said Alok Roongta, chief financial officer at Bharti AXA Life Insurance. The BSE Sensex rose 1.3 per cent, or 318.95 points, to end at a record closing high of 24,693.35, although the index is still around 3 percentage points away from the all-time high hit last week. This brings the BSE's gain so far for the year in dollar terms to 23.71 per cent in 2014, compared to the next best performer, Indonesia's IDX Composite which gained 22.7 per cent. The Sensex rose 2.4 per cent for the week, marking its third consecutive weekly gain. The broader Nifty rose 1.25 per cent, or 90.70 points, to end at 7,367.10, posting a weekly gain of 2.3 per cent. SBI surged 9.6 percent, after earlier hitting its highest since May 2011. The state-run lender said net non-performing loans as a percentage of total assets fell to 2.57 percent in the March quarter from 3.24 percent in the preceding quarter. SBI's share gain was its biggest single-day advance since Sept. 5, 2013. The results at SBI sparked gains in other state-run banks, with Punjab National Bank rising 5.4 per cent. Also, hopes of reforms in the power sector by the new government continued to drive shares in the sector. NTPC Ltd rose 3.9 percent and Tata Power Co gained 6.4 per cent. Ashok Leyland Ltd surged 13.7 per cent after the company's January-March operating profit of 1.84 billion rupees ($31.5 million) beat some analysts estimates. Reliance Communications rose 4.2 per cent after the Financial Times reported that the company was in talks with China's Citic Telecom 1833.HK over an undersea cable joint venture, citing unnamed people familiar with the talks. Among decliners, Motherson Sumi Systems Ltd fell 1.5 percent adding to Thursday's slump of 2.3 percent after operating margins at its European unit Samvardhana Motherson B.V. lagged some analysts estimates in the January-March quarter. ITC Ltd, India's largest cigarette maker, ended 0.8 percent lower despite Jan-March earnings beating estimates as traders continued to move out of defensives to domestic cyclicals.(Reuters)
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Indian markets are so confident the Opposition party led by Narendra Modi will win the country's elections that brokers fear anything short of a decisive victory could spark the worst sell-off in years. Shares hit a record high on Friday (9 May) as opinion polls pointed to a sweeping win for the Bharatiya Janata Party, seen as more business friendly than the rival Congress party. But caution about the vote results may prove warranted. Most investors were caught off guard in the past two general elections - in 2004 and 2009 - as opinion polls got it badly wrong. Now some precautionary moves are being made. Customers say at least four brokerages have raised margin requirements due to concern there could be intense volatility after election results are unveiled on Busine May 16. The stock market regulator has asked exchanges to test their trading systems, according to an agency official, especially new mechanisms put in place last year to deal with market volatility. The Securities and Exchange Board of India (Sebi) did not reply to a written request for comment. A surprise could knock both shares and the rupee. The gains stem from the assumption the BJP and its National Democratic Alliance (NDA) will win a majority, or near it, making Modi India's prime minister. From Sept. 13 - the day the BJP nominated Modi as its prime ministerial candidate - through Friday, the National Stock Exchange, India's biggest bourse, surged 17 percent, compared with only a 4 percent gain for the MSCI Asia-Pacific index excluding Japan. On Friday, the NSE index rose as much as 3.2 per cent, hitting a record high of 6,871.35. Should BJP do poorly in the vote and Modi not become prime minister, some analysts predict shares could plunge 8 to 10 percent in one day, and up to 20 percent in the aftermath. That would roughly match what happened in 2004, when investors were shocked that the BJP didn't win the election. The NSE index fell 12.2 percent in one day, and 19 percent over two. Ritu Jain, managing director of investment bank Eos Capital Advisors in Mumbai, said the recent rally in Indian shares "has been largely in anticipation of NDA coming to power with a majority or near to majority." "In the event of NDA not coming to power, markets can correct by about 15 per cent or a little more." Heavy Foreign BuyingThe BJP has long been seen by markets as being more investor-friendly than the Congress party, spurring hopes Modi will revive an economy growing at its slowest pace in a decade. The hopes have sent sectors such as infrastructure and banks sharply higher. Foreign investors have also bought in heavily, and now own a record 22 per cent of companies listed on the NSE, according to Morgan Stanley data, after buying a net $20.1 billion last year and about $4.3 billion so far in 2014. However, that high a level is raising concerns of possible destabilising foreign outflows that dent both the currency and shares. A scenario of stock market volatility and huge volumes would mark the first major test for trading-system improvements made by Indian exchanges after a slew of "fat finger" incidents hurt confidence. In a bid to prevent cases like a 2012 misplaced order that caused the NSE to plunge more than 15 percent, stock market regulator Sebi in September revbiised rules for circuit breakers. These allow for a more measured and more flexible response to sudden market movements. An official of Sebi told Reuters last week that it asked exchanges to conduct stress tests to simulate a surge in trading volumes and volatility, including circuit breakers. "We need to ensure that the pay-in and pay-out obligations are met in such an event, and that the exchanges can handle a sudden surge in volumes," said the official, who declined to be identified. A spokeswoman for NSE declined to comment. A spokesman for BSE, the oldest exchange, said "I am not aware about any special communication from Sebi. I will check on that. But all systems are checked before market hours." Higher Margin RequirementsAn official at MCX-SX, India's smallest stock exchange, said all three stock exchanges in India have been asked by SEBI to check their trading systems, and had met regularly with regulators over the previous two months. "(Trading) systems have been checked and geared up accordingly," the offical told Reuters, declining to be identified because he was not authorised to speak to media about it. The MCX-SX did not reply to a written request for comment. Ahead of the election results, Kotak Securities has increased margin requirements for retail investors by 10 percentage points to 30 percent of outstanding exposure to markets, while limiting funding for those trading with borrowed money, according to several customers who say they were informed of the change. Kotak Securities declined to comment, as did Kisan Ratilal (KR) Choksey and Geojit BNP Paribas, two other brokerages with customers who said stiffer margin requirements have been imposed. A fourth brokerage, Sharekhan, confirmed having raised margin requirements. For some investors, caution about leverage could prove necessary. "The valuations suggest expectations are running high, so even a slight disappointment after the final outcome could prove disastrous," said Walter Rossini, who manages the 130 million euros Gestielle Obiettivo India Fund in Milan.(Reuters)
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The mercurial rupee has been keeping the government on its toes. Considering all short- and long-term options, the Reserve Bank of India has been taking a series of measures to keep the rupee in line. The latest came on Tuesday, 23 July. The RBI set the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank at 0.5 per cent of deposits, outstanding as of the last Friday of the reporting cycle two weeks prior to the current one.The central bank also said banks need to maintain 99 per cent of their daily cash reserve ratio requirements with the RBI, as against 70 per cent now. The measures could suck out Rs 4,000-Rs 5,000 crore from the system.RBI also capped the borrowing limit for an individual standalone primary dealer under the central bank's daily repo window at 100 percent of net owned funds from July 24. The cap, part of a series of measures to drain liquidity and prop up a falling rupee, will also apply on reporting Fridays of the two-weekly cycle, when the RBI conducts two repo auctions, it said in a release on Tuesday.While various short-term market steps have not been very successful so far, the government has been contemplating enticing the estimated 25 million NRIs to invest in rupee-denominated bonds or deposits which any way is likely to demand big risk premium to support the rupee. Last week, the RBI's effort to support the rupee by sucking liquidity from the market through a $2 billion bond sale fell short as it accepted just over one-fifth of the bids. On 23 July, the apex bank failed to receive any bids at its second consecutive special repo auction for mutual funds. The central bank is offering the special repo facility at the Marginal Standing Facility (MSF) interest rate of 10.25 per cent. Last week, the RBI had said it would offer a total of Rs 25,000 crore to banks for funding mutual funds through a special repo window to meet their liquidity needs.Read Also: RBI Takes More Steps To Tighten LiquidityRead Also: India To Call On NRIs To Defend RupeeOn 22 July, talking to news agency Reuters, government officials said it was considering tapping the 25-million strong Indian diaspora to help reverse the rupee decline. Non-resident Indians (NRIs) already hold more than $100 billion in funds in India. Central bank figures show NRIs held $58 billion in dollar deposits as of September 2012, plus local currency deposits worth 3 trillion rupees. New Delhi is considering the time-tested recipe of raising money from non-resident Indians (NRIs) via debt or deposits. The government said all options to support the rupee are on the table, although the sources said tapping NRIs was considered a better option at this time than issuing a sovereign bond.How To Foot The Dollar Bill?However, tapping the NRIs may not be such a cakewalk. The NRIs are patriotic up to a point. In fact their patriotism may amount to 5 or 6 percentage points of annual investment returns when it comes to providing the hard currency needed to revive the rupee."The government may not get terms as favourable as they might like but the cost of borrowing would be lower than onshore, and that's an incentive," said Philip McNicholas, BNP Paribas economist in Hong Kong."An NRI bond issue could be a quick and easy way to raise dollars as it may face less political push-back and you are tugging at the heartstrings of the diaspora," he said.Bankers and analysts estimate the government will have to pay between 5 per cent and 6 per cent on domestic dollar deposits for a 5-year period if it wants to lure overseas Indian money."The sweetest of the sweet spot will be five years and 5 per cent," said a private banker with a Swiss Bank in Hong Kong, whose clients include NRIs.At 5 per cent, that would be at least 370 basis points over benchmark US treasuries, higher than the returns on bonds and deposits in 1998 and 2000 — the last time India tapped its diaspora to support a weakening currency — of about 250 basis points over US treasuries."The economy had better prospects in the 1990s," said a non-resident Indian banker in Singapore. "The services sector was opening up too then."Now, weak foreign direct investment and a record current account deficit suggested investors would demand a premium to part with their money."How will India fund its dollar bill?" he said. Those risks and the uncertainty of a general election due by 2014 also suggested NRIs will be reluctant to commit funds beyond five years, the bankers and analysts said.It may be tougher to entice the NRIs to invest in rupee-denominated bonds or deposits because they will carry the currency risk.The rupee has fallen close to 8 per cent against the dollar so far this year, second only to the Japanese yen in rankings of the weakest currencies in Asia monitored daily by Reuters. It hit a record low of 61.21 on July 8 and was trading on Tuesday around 59.75.While some investors may be attracted by the prospect of capital appreciation in the record-low rupee, coming on top of an attractive coupon yield, some are not convinced the currency will not weaken further."Even at a 12 per cent interest rate, they won't find anyone willing to buy rupee bonds," said the Indian banker based in Singapore.That would be at least 300 basis points over the rate banks currently offer on non-resident rupee deposits and compares with an 8.5 percent yield on five-year government bonds.A Time-tested PloyIn the midst of a balance-of-payments crisis in 1991, India used a tax-forgiveness plan for NRIs to get them to bring money home.In 1998, it issued a five-year Resurgent India Bond offering 7.75 per cent in dollar terms, raising more than $4 billion.In 2000, it raised $5.5 billion through an India Millennium Deposit scheme, which paid 8.5 per cent for 5-year dollars.Wealthier investors may need more sweeteners, such as the ability to leverage the investment by say four times, the private banker said. That would imply an enhanced yield of 13-14 per cent on a dollar deposit.The current account deficit amounted to $87.8 billion in the financial year to March 31, a record 4.8 per cent of GDP. Although one government source said on Monday the government could try to raise as much as $20 billion via NRIs, bankers said such a target would be tough to reach."It is ambitious," said Abraham Chacko, executive director at Federal Bank, a private-sector bank in India with assets of $12 billion."We (India) get about $60 billion a year, so talking about $20 billion now is ambitious. But it will be higher than in the previous years."(BW Online Bureau & Reuters)
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The Reserve Bank of India on Tuesday, 23 July announced further measures to tighten banking system liquidity and to stabilise the falling rupee.The RBI set the overall limit for borrowing under the daily liquidity adjustment facility (LAF) for each bank at 0.5 per cent of deposits, outstanding as of the last Friday of the reporting cycle two weeks prior to the current one.The central bank also said banks need to maintain 99 per cent of their daily cash reserve ratio requirements with the RBI, as against 70 percent now.Earlier, RBI failed to receive any bids at its second consecutive special repo auction for mutual funds on Tuesday.The central bank is offering the special repo facility at the Marginal Standing Facility (MSF) interest rate of 10.25 percent.Last week, the RBI had said it would offer a total of Rs 25,000 crore to banks for funding mutual funds through a special repo window to meet their liquidity needs.(Reuters)
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The Reserve Bank of India on Monday, 22 July moved to tighten gold imports again in an attempt to rein-in a record high current account deficit by taming demand for the yellow metal.The RBI asked all nominated banks and agencies to export at least one-fifth of every lot of imported gold in all forms, and locally make it available only for jewellers.The central bank said banks need to retain 20 percent of the imported gold in customs bonded warehouses, and will only be able to further import gold after exporting at least 75 percent of the gold from those warehouses.Last month, the RBI had ruled out any transactions for imports unless they were intended to make jewellery for export, as it looks to rein in a record current account deficit.India's current account deficit hit a record high 4.8 percent of gross domestic product in the fiscal year that ended in March, fuelled by rising imports of oil and gold. (Reuters)
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With the second-largest diaspora in the world, a community estimated at more than 25 million, the government plans to to call on the NRIs to help reverse a record slide in the rupee, dismissing for now the idea of a global sovereign bond, senior government officials said on Monday, 22 July. Non-resident Indians (NRIs) already hold more than $100 billion in funds in India. Central bank figures show NRIs held $58 billion in dollar deposits as of September 2012, plus local currency deposits worth 3 trillion rupees.Acknowledging the country faced a dilemma, the officials said India was running out of options and time to revive the currency and fund a record current account deficit but equally it was wary of sending any distress signals to international markets.Last week, the RBI's effort to support the rupee by sucking liquidity from the market through a $2 billion bond sale fell short as it accepted just over one-fifth of the bids.Read Also: Rupee Falters As Govt Rules Out BondsThe currency's vulnerability was laid bare by the sea-change in global capital flows following speculation that the US Federal Reserve would begin to wind down its money-printing stimulus programme later this year, which convinced investors to pull money out of riskier assets. While trying to conserve its currency reserves, equivalent to just seven months of imports, the RBI has sought to limit avenues for speculation against the currency, to buy time for Prime Minister Manmohan Singh's government to come up with measures to reduce the external deficits. A relaxation of rules for foreign direct investment announced on 16 July for several industries, including telecommmunications, failed to give big boost to sentiment.Some financial market participants had speculated the government would issue an overseas bond to raise foreign money to defend the rupee, which fell to a record low earlier this month, like it did during previous bouts of rupee volatility in 2000 and 1998. The Reserve Bank of India does not support issuing a sovereign bond either, one official said."All have agreed that it is not a time for India to issue sovereign bonds at this stage," the official said. "We do not have much options. Whatever has to be done, will be done in the next few weeks," the official said. "We have a window of only few weeks," he said. The rupee weakened on Monday, 22 July after sources revealed that the government is not considering issuing a sovereign bond to offshore investors right now, dampening hopes for large dollar fund inflows which could have changed the rupee's fortune.Today's fall in absolute terms is the biggest drop since the rupee's 39 paise decline on July 8, when it plunged to record low of 61.21.Global Bond Issue May Send Distress SignalIssuing a global bond might send such a signal, so instead policymakers will focus on attracting funds from Indians living abroad, such as by raising deposit rates in India or issuing bonds specifically designed for them - repeating measures carried out in 1998 and 2000 to steady a weak rupee.The officials said an increase in central bank policy rates and allowing select firms to raise capital overseas were also being considered."All have agreed that it is not a time for India to issue sovereign bonds at this stage," one official said, adding that the central bank agreed with that position too."We do not have much options. Whatever has to be done, will be done in the next few weeks," the official said. "We have a window of only few weeks," he said."The government could ask banks to raise interest rates to attract an additional $15-20 billion," he said.The news prompted the 10-year benchmark 7.16 per cent, 2023 bond yield to jump 8 basis points to 8.08 percent, while the rupee ticked lower on the news that a global bond was not being considered right now.Since the rupee's rapid decline, inflows of money from NRIs have risen, the government official said. The currency traded at around 59.70 per dollar on Monday to be about a percent above its record low of 61.21 hit on July 8.The rupee has steadied somewhat since the Reserve Bank of India (RBI) took unprecedented steps last week to try to create demand for the currency by aggressively draining cash from money markets and sharply raising short-term interest rates.Some of the rupee's fall - 12 per cent since May - reflects a broader selloff in emerging markets on signs of a winding down of US stimulus.But there are also specific fears about India's slowing economy, a lack of substantive reforms and its large current account deficit. That is reflected in foreign fund outflows from India's debt and equity markets since late May of $11.5 billion."The government must be weighing the pros and cons of various options available to them, which would be most effective in attracting capital," said Upasna Bhardwaj, economist with ING Vysya Bank in Mumbai. Options include the issuing of NRI bonds and encouraging state-run firms to raise foreign debt, she said."If attractive yields are provided, any of these options could be successful."Huge DiasporaChief Economic Adviser Raghuram Rajan told reporters that the government "has not dropped any options" for stabilising the rupee.India has taken some steps this year to try to attract foreign investment, such as easing registration rules and increasing ownership limits for long-term investors such as sovereign wealth funds.Measures from the Securities and Exchage Board of India (SEBI) aimed at curtailing speculative positions against the currency gave it some reprieve, but market participants are bracing for a rise in policy rates or other aggressive measures to attract foreign money."We understand that we need funds to finance our current account deficit but we do not want to send any signal of panic outside India," a second government official said."The rating agencies are already watching us closely, we have to manage the situation in a subtle manner," he said.The government's first line of defence therefore would be to woo non-resident Indians, sources said.NRIs lapped up bonds and deposits issued by India in 1998 and 2000, helping bridge massive gaps in India's funding needs. Now, with a current account deficit at a record 4.8 percent of economic output, the country needs all the funding it can get.The government sources said India could consider raising the repo rate, the central bank's main policy rate, if the rupee falls towards 61-62 to the dollar, citing recent meetings between the government and the RBI.The government is also considering allowing select companies such as state-run India Infrastructure Finance Co Ltd or IDFC Ltd to raise up to $4 billion in debt abroad, they said.The first official said state-owned banks are likely to be asked to raise funds from overseas markets to meet their capital needs."Even if 5-7 banks raise $1 billion each, it will help us," he said.(Agencies)
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India will sell Rs 23,661 crore worth of government debt limits to overseas investors on Monday, 22 July, amid sharp selling in bonds owing to uncertain policy environment.These quotas give foreign investors the right to invest in debt up to the limit bought.The recent sell-off in bonds come after the Reserve Bank of India raised short-term borrowing costs, restricted funds available to banks and said it would sell Rs 12,000 crore in bonds on Monday, effectively draining cash from the market, to protect a rupee that had hit a record low last week.Dealers say demand for the debt limits is expected to be poor as the recent measures have lifted interest rates in the economy wiping out hopes the Reserve Bank of India would cut interest rates in the near term.Foreign investors have sold $1.77 billion in debt so far this month, according to data at the market regulators website.India will not auction corporate bonds after doing away with auctions for this segment of debt until 90 per cent foreign ownership is reached.The benchmark 10-year bond yield rose more than 50 basis points after RBI measures on Monday.(Reuters)
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The Group of 20 nations backed a tax plan on Friday (19 July) that takes aim at the loopholes used by multinational firms and responds to anger among voters hit with higher tax bills to cover soaring national debts.Finance ministers and central bankers gathering in Moscow were otherwise focused on charting a course towards global economic recovery, and seeking to calm financial markets worried about the impact of stimulus programmes.The G20, a forum that took the lead in the 2008-09 financial crisis, now faces a multi-speed global economy in which only the United States appears to be nearing a self-sustaining recovery.China, for years the engine of global growth, is suffering a slowdown amid doubts over the stability of its financial system, Japan has only recently embarked on a radical fiscal and monetary experiment, and Europe's economy is more stop than go.Collective efforts to balance the prospect of a withdrawal of US monetary stimulus against expansionary policies elsewhere evoke visions of passengers rushing from port to starboard to stabilise a listing ship.Chairman Ben Bernanke's guidance in May that the Fed may start to wind down its $85 billion in monthly bond purchases - intended to ease the flow of credit to the economy - triggered a steep sell-off in stocks and bonds, and a flight to the dollar.Investors were calmed by dovish testimony to Congress this week by Bernanke, who is not coming to Moscow. Yet emerging markets - especially those that depend on commodities or that have external deficits - have underperformed.There will be some focus on central bank's giving so-called forward guidance, essentially managing market expectations. "(It is) crucial for preventing serious volatility on financial markets", Russian Finance Minister Anton Siluanov told reporters.Negotiators working on a joint communique reconvene after a drafting session on Thursday night that sources said was less fraught than at the February G20 meeting in Moscow. Ministers review the text over dinner.Also on Friday, the BRICS emerging markets caucus - Brazil, Russia, India, China and South Africa - was due to meet. They were unlikely to progress on joint steps, such a shared pool of forex reserves, to guard against capital flight.Jobs CommitmentThe United States is beating its fiscal targets thanks to improving growth and Washington has urged the G20 to prioritise growth over fiscal consolidation sought by Europe's largest economy, Germany.G20 labour ministers, who met on Thursday, hold a joint session on Friday with finance ministers, putting the jobs crisis in Europe - where youth unemployment is nearly 60 percent in debt-strapped Greece and Spain - at the centre of the debate."Getting people back to work must be top of the agenda," U.S. Treasury Secretary Jack Lew wrote in an article for the Financial Times. "In many parts of the world, such as Europe, growth is too weak to drive job creation."Lew also urged China to speed reforms towards demand-led growth. Other G20 nations, led by Japan, are seeking greater clarity from China on how strains in its 'shadow' banking system will play out.The European Union's employment commissioner, Laszlo Andor, shared Lew's prescription for recovery, telling Reuters that investment in jobs was vital for maintaining social peace and emerging from years of austerity."If in the name of competitiveness and internal devaluation you just compress wages constantly, you also kill demand and you can kill the recovery," Andor said.The G20 released a tax action plan drawn up by the Organisation for Economic Co-operation and Development (OECD) that said the existing system didn't work, especially when it came to taxing companies that trade online.The tax plan is one of the major 'deliverables' that will go go before the summit of G20 leaders being hosted by President Vladimir Putin in St Petersburg in early September.Protest In MoscowRussia, the first big emerging nation to host the annual presidency of the G20, finds itself in an awkward political spot following the flight of former U.S. spy agency contractor Edward Snowden to Moscow.G20 delegates arriving at Sheremetyevo airport may not have bumped into Snowden, who has requested asylum in Russia, but they run into a protest in Moscow over the jailing on Thursday of a prominent Russian opposition politician.Alexei Navalny, who organised protests against Putin's election for a third Kremlin term last year, was sentenced to five years in prison for theft in a case that drew international condemnation as politically motivated.Navalny was released on bail on Friday pending an appeal.Officials checking in to the five-star Ritz Carlton hotel on Moscow's central Tverskaya Street paid little attention to thousands of Navalny supporters protesting outside, in keeping with a G20 tradition of keeping politics and policy separate."The rally and the traffic jams are causing meetings to be postponed," said one European diplomat. "But we fully understand the democratic right to protest."
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Seeking to boost investor sentiments, Prime Minister Manmohan Singh on Friday, 19 July, assured the industry that the government will further relax FDI norms and Reserve Bank will soon start granting bank licences.He expressed the hope that the impact of the reforms will boost economic growth rate in the second half of this year."Foreign Direct Investment (FDI) has been liberalised in single brand retail, multi-brand retail, civil aviation and power exchanges. More FDI reforms are on the anvil," he said here at a function.In big-ticket reforms push, the government on July 16 decided to hike FDI in a sectors like telecom, insurance and defence, to boost the sagging economy.He also said a new bank licensing policy has been announced and new licences are soon to be awarded.Read Also: Govt Allows 100% FDI In Telecom, Raises Cap In 12 SectorsRead Also: Steps To Lower CAD Soon: PMAdmitting the economy was going through a difficult period, Prime Minister Manmohan Singh assured the industry that government will leave no stone unturned to ensure a rebound. "We will leave no stone unturned to ensure that the economy rebounds. I appeal to each one of you not to be overcome by negative sentiment," Singh said while addressing the annual meeting of industry body Assocham."Let me begin by stating upfront that we, like most other countries, are going through a difficult period... It (industry) is looking to the government to bring the economy back to a higher growth path. This is a legitimate expectation and is also upper most in our mind," he said. Citing reform measures undertaken over last one year, the Prime Minister said, sugar has been fully decontrolled and at the same time investment policy for urea has been approved.He also said railways have corrected their fares for the first time in a decade.Speaking about GAAR, which has been a subject matter of considerable concern to industry, he said, it has been postponed by two years and there is greater clarity on the rules.Besides, taxation issues of the IT sector and of development centres have been resolved based on the Rangachary Committee report, he added.Gas pricing has been corrected to reflect market realities better, he said, adding, procedural improvements have been made in the road sector to improve the economic viability of projects."We will persevere with these initiatives and I hope that their impact will be felt in the second half of this year," he said.Emphasising that public sector investment has been fast- tracked, Singh said, "I have estimated that over Rs 120,000 crore has been invested by major PSUs last year."On the supply side, he said "we need to push our exports.The depreciation in the rupee will help. There is a time lag before this benefit will be felt in terms of export volumes, but orders being booked from now on would certainly benefit."The government is also trying to remove the constraints in the export of iron and other ores which saw a considerable decline during the last one year.Falling for consecutive two month, exports declined to 4.56 per cent in June.He also expressed the commitment to bring down the current account deficit by addressing both the demand side and the supply side of the problem.On the demand side, he said, "We need to reduce the demand for gold and the demand for petroleum products the two biggest components of our trade deficit."The government has taken measures to control the demand for gold and they have had some effect."Gold imports declined sharply in June, and I hope they will stay at normal levels from now on," he said.On petroleum products, the Prime Minister said "we began a process of correcting the prices of petroleum products last year. The gradual correction that was taking place in diesel prices had reduced the gap in under-recoveries from almost Rs 13 per litre to less than Rs 2 per litre."Unfortunately, some of this has been undone by the depreciation of the rupee, he said, adding: "we too experienced a significant depreciation in the exchange value of the rupee. In our case, it was perhaps exacerbated by the fact that our CAD in the balance of payment had increased to 4.7 percent of GDP in 2012-13."However, he said, the policy of adjusting prices to progressively eliminate under-recoveries remains in place. (Agencies)
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