Raising a red flag over "empty promises" of the Modi government, global giant Moody's on Thursday (30 July) said delay in key reforms is denting business confidence and the foreign investors are wary of investing in India. While pegging India's true growth potential at near 10 per cent, Moody's also warned that "GDP growth is not likely to rise above 7.5 per cent if the government continues to over-promise and not deliver". It further said that the "jury is still out on Prime Minister (Narendra) Modi", but the government's failure to deliver on promised reforms is a major impediment to a broader economic growth momentum in the country. In a report titled 'India's Outlook: Waiting for Reforms to Fuel Growth', Moody's Analytics also cautioned against tampering with the independence of RBI in deciding on interest rates, saying it would hurt India's economic prospects, even as it hoped that the central bank could effect two more 25 basis points rate cuts in 2015 to boost growth. A new draft of the Indian Financial Code has suggested creation of an interest rate-setting panel, where majority of seven members will be nominated by the government and the RBI chief would not have any veto power over the panel's decision. "We believe that a government-elected panel undermines the RBI's independence. Moving to the new model would severely dent the RBI's competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced," the report said. Moody's Analytics is the economic research analysis unit of Moody's Corporation and is independent of Moody's Investor Service, the credit rating agency of the US-based group. "Overall, we believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability," it added. Terming this move a "dangerous road ahead", the report said "a recent draft bill could undo the RBI?s good work". It also added that India's monetary policy has been effective with Governor Raghuram Rajan at the helm and hoped that given the criticism of the draft Indian Financial Code bill, it is unlikely to pass Parliament.(PTI)
Read More
Asian airlines are preparing to hedge more jet fuel in a bid to lock in profits, betting that a recent slide in crude prices to five-month lows will taper off near $50 a barrel. Hedging activity is picking up after a lull in the first six months when a 50 per cent jump in Brent, from a six-year low of $45.19 in January, made such purchases unattractive. An $11 drop in July to below $53 on global glut worries has revived hedging interest, traders said. "Some airlines are popping in and hedging bits and pieces daily at a Brent price of $55 and down to $50," said a trader with a bank that handles hedging for many Asian airlines. "Most airlines think oil prices are cheap and have hit their (bottom)," he added, declining to be named due to rules on talking to media. Indonesia's PT Garuda Indonesia Tbk, which has hedged 45 per cent of its 2015 jet fuel needs, is now looking to raise that to at least 50 per cent, versus 10 per cent in 2014. Garuda's hedging strategy, together with cost cuts, helped it swing to a first-half net profit this year. Air New Zealand too has raised its hedging ratio, to 57 per cent for the fourth quarter from 10 per cent a year ago. South Korea's Asiana Airlines, which had stopped hedging at the end of 2014 to escape oil market volatility, has increased its third-quarter jet fuel hedge ratio slightly versus the previous two quarters. Jet fuel accounts for anywhere between 20 and 50 per cent of an airline's operating costs. Low oil prices have driven global airlines to forecast 2015 industry profits of $29.3 billion, almost double from last year. SOME STILL WARYCertain airlines, however, are cautious about hedging after a bitter experience in 2008, when carriers scrambled to lock in fuel costs as crude surged above $100 for the first time only to see prices plummet to less than $40 before year-end. With jet fuel prices down around 16 per cent this month, some airlines see spot purchases as a better option. For 2015, Thai Airways International has hedged about 80 per cent and plans to buy the rest from the spot market, a senior official said. The airline expects to save costs of about 16 billion baht ($455.45 million) this year due to its hedging strategy and lower oil prices, he added. Japan's ANA Holdings Inc and Japan Airlines have hedged 40 per cent and plan to keep it at that. The cost of hedging crude has dropped to the lowest in a decade, said Maybank analysts, as caution caps hedging volumes. "It is ironic that whilst the cost of protection is cheap and fuel hedging strategy is best adopted now, many airlines are choosing not do so," they added.(Reuters)
Read More
India has the potential to become a multi-trillion dollar economy with a per capita income of about $40,000 by 2050 if it manages to grow at seven per cent annually for the next 30-35 years, a top World Bank official has said. "If we can manage to grow at seven per cent for next 35 years, we will not only be the second largest economy in the world at that time but we will be prosperous and people will be rich enough," World Bank Executive Director for Bangladesh, Bhutan, India and Sri Lanka Subhash Chandra Garg said. Addressing the Indian-American community at the Indian Consulate, Garg said India has the potential to become a multi-trillion dollar economy with a per capita income of about $40,000 by 2050 as against the current $2,000 but to achieve that it will have to grow at seven per cent annually for the next 30-35 years. However, he said that achieving and sustaining a seven per cent growth rate for 35 years is "very difficult" and "would require a lot of transformation in the way we manage our economy". He underlined that India will have to transform its agriculture completely, grow its services and manufacturing sectors and give a boost to healthcare and tourism. Garg noted that a "big challenge" will be to get people out of agriculture and use them in the manufacturing and services sectors, while also ensuring that agricultural production in the country increases. He acknowledged that the Indian government's push on manufacturing through its 'Make in India' initiative is required to boost the sector in the country and contribute to economic growth. "We will need to produce for us and manufacturing will be a story which requires another transformation," he said adding that a much bigger concentration and necessity will be to boost the services sector. About 55 per cent of India's population is already working in the services sector but the country has to aim to bring this to 80-85 per cent of the population. Noting the advantage of demographic dividend which India has, Garg said there is need to transform this young population into extremely productive. "We should plan to export one-two million people every year with new skills all over the world," he said, adding that the government should pursue a policy to equip its young people with training and skills and send them abroad to provide services in various fields. He noted that the World Bank is working very closely with the Indian government and contributing to making its vision of a strong and prosperous nation a reality. Garg said from the smart cities initiative to the Swachh Bharat campaign, the Bank is partnering with the government in projects that are aligned with its policies. (PTI)
Read More
The government on Wednesday (29 July) said it has cleared seven foreign investment proposals, including that of Hathway Cable and Datacom, totalling over Rs 981 crore. The proposals worth Rs 981.15 crore have been cleared by the Finance Ministry following recommendations for the same by the Foreign Investment Promotion Board (FIPB). Hathway Cable and Data Com Ltd has got approval for increasing foreign investment limit for FIIs and FPIs, among others under the portfolio investment scheme from the current 49 per cent of its issued and fully paid up share capital to 74 per cent. The Ministry said the proposal, related to telecom and broadcasting sector, entails investment worth Rs 963 crore. Hyderabad-based Celon Laboratories too has got permission for downstream investment in a brown field pharma company. The investment has been estimated at Rs 16 crore. Cyprus-based Lalea Trading, related to real estate, has been granted permission for repatriation of investment. The clearance will lead to FDI outflow of about Rs 23.27 crore. The FIPB, in its July 3 meeting, has also cleared application of Kotak Mahindra Bank. The private sector bank had sought approval for increasing the aggregate foreign investment to 55 per cent following a merger between ING Vyasa Bank and Kotak BankBSE -0.43 %. Also, the decision on six FDI proposals including that of Den Networks, Reliance Globalcom (Bemuda), Sistema Shyam Teleservices and Indian Rotocraft was deferred in the meeting. Meanwhile, the FIPB headed by Finance Secretary Rajiv Mehrishi will meet again tomorrow to decided on over 40 investment proposals. (PTI)
Read More
The Federal Reserve is expected on Wednesday (29 July) to point to a growing US economy and stronger job market as it sets the stage for a possible interest rate hike in September. The US central bank is scheduled to issue its latest policy statement at 1800 GMT following a two-day meeting, spelling out how policymakers feel the economy has progressed since they last met in June. Earlier this year the Fed embraced a meeting-by-meeting approach on the timing of what will be its first rate hike since June 2006, making such a decision solely dependent on incoming economic data. With a slew of employment, inflation and GDP reports to come before its September meeting, the Fed is unlikely to hint too strongly about its plans, Barclays economists Michael Gapen and Rob Martin wrote in a preview of this week's meeting. But simply hewing to the language of the June policy statement, when the Fed said the economy was expanding moderately, or even strengthening the outlook a bit, "leaves the door wide open for September," they wrote. Despite a dovish reputation, Fed Chair Janet Yellen has been among those pulling on the door handle in recent public statements, saying she felt a rate hike would be appropriate sometime this year absent a negative shock to the economy. Although another collapse in energy prices and growing economic uncertainty in China is clouding the global economic outlook, the Fed has largely looked beyond recent turmoil overseas. Instead, it has focused on the steady growth in the US job market and on policymakers' expectations that inflation will eventually rise to the central bank's medium-term objective of 2 per cent. The US unemployment rate is 5.3 per cent, near what many officials consider full employment. An economic contraction in the first quarter also has been set aside as an aberration, the result of a harsh winter and statistical "noise" that federal number crunchers are now trying to fix. Early projections that the second quarter was also going to be weak have since turned around. A "real-time" gross domestic product forecast by the Atlanta Fed as of the middle of May projected 0.5 per cent annualised growth in the second quarter. When the final estimate was issued this week, the forecast had jumped to nearly 2.5 per cent annualised growth. (Reuters)
Read More
Flagging the issue of lack of enough economists in the country, Reserve Bank India (RBI) Governor Raghuram Rajan has said that the inability to get quality talent may be hurting policy-making. "In our country, there is a tremendous need for capable economists. I see that everyday in my work. There is a need in Delhi, in Mumbai and all over the country. We have lost a generation of economists," Rajan said. Underlining the need for good economists to frame sensible policies, Rajan said, "The kind of economics we need is based on a good understanding of the fundamentals of economics such as price theory and general equilibrium, which is the hardest concept to understand." He added: "A lot of policy-making is done without understanding the general equilibrium which is often the key contribution that an economist can make to the dialogue." The Governor made the remarks after inaugurating the Meghnad Desai Academy of Economics in Mumbai on Tuesday.Though it was a closed-door event, the organisers issued a statement today quoting the Governor. At the event, Rajan said there is a need for "rigorous fundamentals" in economics based on blood, sweat, tears and toil. Rajan, an academic-turned-central banker, also stressed on the need for academic institutions to focus equally on research as well. He also promised all help from RBI to the newly started institute. Apart from Desai, the Indian-origin British economist, the academic board of the institute comprises Goldman Sachs chief India economist Tushar Poddar, IMF deputy director Mangal Goswami, executive editor of Mint newspaper Niranjan Rajadhyaksha and Birla Group economist Aditya Ranade.(PTI)
Read More
Economists and investors have turned optimistic about the Indian economy since the Narendra Modi-led National Democratic Alliance (NDA) government came to power in May 2014. India continues to lead the global confidence index for the quarter with a one point increase from last quarter to 131 followed by Philippines (122) and Indonesia (120). The consumer confidence in urban India reflects levels last achieved in the first quarter of 2011, which, according to Nielsen, has been propelled by a positive growth in consumer spending on consumer packaged goods and a gradual decrease in job security concerns. An increase in consumer confidence index is a sign of brighter prospects for an economic recovery. Inflation makes consumers baulk and tuck away their purses. Additionally, higher inflation translates into monetary tightening and higher interest rates which again stifle consumption. These factors are now gradually easing. Inflation, measured by the consumer price index, came off its double-digit stretch by December 2013. Since August last year, inflation has remained below 6.5 per cent for the most part. The current inflation rate is also within the Reserve Bank of India's (RBI) 6 per cent target for January 2016. In May, the output of eight core sector industries expanded for the first time in three months to 4.4 per cent helped by a recovery in the production of electricity, cement and oil refining. This was the highest growth since November 2014 and reflects a pick-up in the investment cycle and the economy. Indirect tax collections in the April-June period of 2015-16 have risen by over 37 per cent, much higher than the 19 per cent growth target set by the Union Budget for the current financial year. International commodity prices continue to remain depressed. Lower oil prices mean reduced financial burden that the government has to bear on account of subsidies for petroleum products and fertilisers. Gold prices too have fallen making imports of the yellow metal more manageable from the balance of payments point of view. Investment activity in the country is expected to see a revival soon with the RBI having cut interest rates thrice since January by 25 basis points each, taking repo rate to 7.25 per cent. Banks have also started passing on the benefits to consumers by cutting lending rates. However, the index of industrial production (IIP) for the month of May came in at 2.7 per cent, falling from 4.1 per cent. Analysts are of the view that since November 2014, IIP numbers have been reasonably robust, averaging about 4 per cent. So it's an aberration but the overall trend hopefully remains positive. The economy is expected to expand 7.6 per cent this fiscal year ending in April 2016. Growth is seen picking up to 8.2 per cent next fiscal year. However, a delay in the passage of crucial reforms — Goods and Services Tax Bill and Land Acquisition Bill — high financing costs and a stressed banking sector have hurt the government's plans. At present, the broad numbers on the economy look good. The Modi government should not loses the determination and resolve to reform and fix policy problems to improve growth on a more sustainable basis.
Read More
Greece's most influential think tank warned on Thursday (23 July) of a sharp drop back into recession in a report that came hours after parliament approved a second package of reform measures aimed at securing a new bailout from international lenders. In its quarterly report, the IOBE institute said that capital controls imposed last month to stop a bank run pushing the financial system into collapse would exact a heavy toll across the economy. Reversing a forecast for growth this year of 1 per cent made as recently as April, it said the economy would contract by as much as 2.0-2.5 per cent after growing 0.7 per cent in 2014 and would remain in recession next year as well. The report underlined the headwinds facing leftwing Prime Minister Alexis Tsipras, who must negotiate a bailout worth up to 86 billion euros with sceptical lenders, while struggling to hold his divided Syriza party together. While his own personal popularity is high, a renewed drop into recession after a modest recovery last year would test his government's ability to push through the tough mix of tax hikes, spending cuts and economic reforms demanded by the lenders. Formal negotiations with officials from the European Commission, European Central Bank and International Monetary Fund are due to start in Athens on Friday with the aim of wrapping them up by August 20. But already there have been doubts about whether the severely weakened Greek economy can support the program after a six year-long slump that has cut national output by a quarter and sent unemployment over 25 per cent. Banks have re-opened after the ECB restored emergency funding last week but capital controls remain in place, hobbling companies that deal with suppliers outside Greece and highlighting the fragile state of the financial system. SYRIZA REBELSA senior Greek official said on Thursday that Greece would not reach a one percent primary budget surplus, net of interest rate payments, this year, missing a target agreed with the lenders prior to the imposition of capital controls. The banks, which would collapse immediately without the ECB's emergency funding, face recapitalization but how much the operation will cost will only be known after banking stress tests due to start in August, the official said. After debating the bailout reforms in parliament until near dawn, 36 Syriza rebels defied the government, forcing Tsipras to rely on pro-European opposition parties to pass the measure and raising the prospect of a snap election once the deal is sealed. The rebellion was slightly smaller than in a vote on a first bailout bill last week when 39 Syriza lawmakers dissented. But it confirmed the deep split in the radical leftwing party, which won power in January vowing to end austerity. State Minister Nikos Pappas, one of Tsipras' closest aides, told the semi-state Athens News Agency that the government would move to complete the bailout negotiations before taking a decision on its next political move. "Unfortunately, a rupture has been confirmed but I think we will get the procedures for the deal concluded first and then we will look into all these things at the party," he said. If the talks are not completed in time, European authorities who provided a 7 billion euro bridging loan to allow Athens to meet debt repayments this week, may have to provide further temporary financing. European Economic Affairs Commissioner Pierre Moscovici said that a change in the rules governing the EFSM, an EU fund that was used to provide the first bridging loan, would enable the fund to be used for a second loan.The new rules provide a guarantee to non-euro member states which had been concerned that the fund, intended for the full 28-member EU rather than the narrower group of countries in the single currency, was being diverted to bailout the euro.(Reuters)
Read More
Economic prospects have dimmed since April due to the government’s inability to pass much-needed reforms, a Reuters poll found, but the Reserve Bank of India will probably hold rates steady this year as inflation nudges up gradually. The Reserve Bank of India has already cut benchmark interest rates three times this year to 7.25 per cent and eased credit conditions to boost loan growth and the broader economy, with limited success so far. The economy is expected to expand 7.6 per cent this fiscal year ending in April 2016, only slightly faster than 7.3 per cent last year, according to the median forecast of 31 economists polled by Reuters. Growth is seen picking up to 8.2 per cent next fiscal year. Growth forecasts were nudged down from April owing to concerns the government still faces substantial challenges in kick-starting a reform-driven growth cycle, stifling optimism engendered by Prime Minister Narendra Modi’s election win over a year ago.“Restarting of stalled projects were expected to jump-start the investment cycle, alongside stabilisation in consumption and higher public sector spending to boost overall growth,” said Radhika Rao, economist at DBS in Singapore. “However, a delay in the passage of crucial reforms, high financing costs and a stressed banking sector have hurt the government’s plans.” India’s parliament has just begun a session in which Modi is seeking to pass major legislation that would unite the whole country into one tax zone and make it easier for businesses to procure land. Strong opposition from rival parties coupled with the ruling coalition’s minority in the upper house, however, means it could prove difficult for any consensus to be reached. Slowing growth expectations may warrant calls for the RBI to ease policy again. But with its mandate to keep inflation below 6 percent over the medium-term, and consumer prices expected to rise 5.3 per cent this year and 5.5 per cent next, that is easier said than done. While a slight majority predict there will be no further easing by the RBI, as risks to inflation from poor monsoon rains of the last few weeks remain high, 14 of 31 analysts polled this week called for one more cut in the final months of 2015. In a survey last month, when an initial spell of good rains prompted positive sentiment amongst analysts, a large majority expected another cut this year. But the latest consensus trimmed 25 basis points off the repo rate to 7.0 per cent only in early 2016 and another just before moving into 2017.Monetary policy easing in India puts it out of step with the United States, the world’s largest economy, where interest rates are expected to rise later this year, perhaps as early as September. India’s situation, however, is much better than emerging market peer Brazil, where the central bank has been jacking up interest rates to fight off high inflation even as the economy slips into a deepening recession.(Reuters)
Read More
Calling a turn in a business cycle is a big task. Edelweiss Securities Ltd, in its report, Economy-A step across the line, says there are small signs of a recovery being underway. A perusal of select high frequency indicators reveals that economic recovery is firming up since the past six months. Manufacturing activity has improved on trend basis (primarily capital goods, but consumer goods production as well) and this coincides with the pick-up in imports of machinery goods, turnaround in new investment projects and decline in the number of stalled projects. In fact, order books of capital goods companies too are clocking decent traction. Notably, these indicators have improved despite strong headwinds from scale back in government expenditure, slowdown in merchandise exports and tepid rural sentiments over the past six months. BoP improvement In the past one year, balance of payment (BoP) dynamics have turned around. Large capital inflows (and associated BoP surpluses) are working to ease domestic monetary conditions, lower market interest rates and improve business confidence. Thus, while bank lending is still sluggish, non-bank sources of financing (equity and debt) have picked up, such that aggregate credit flow to the economy has stabilised and picked up in real terms. All this is reflected in traction in domestic economic activity. The only area where vulnerability or risk arises is sustainability of flows, given that inflows have been dominated by portfolio flows, especially debt flows, which can reverse direction fairly quickly. Macro-policies squeeze unwindingAs the economy faced adverse BoP shock amidst large current account deficit (CAD) and high inflation in 2011, policymakers were forced to pursue pro-cyclical belt-tightening to close/narrow the current account gap and contain inflation, reinforcing the downturn. Fiscal impulse is expected to be mildly positive in FY16 after five consecutive years of drag, while the RBI has commenced rate easing cycle. More needs to be done given that corporate real rates are high and the yield curve is largely flat, implying Mint Street is still behind the curve. More importantly, the fiscal drag of the past five years is receding, with the fiscal mix becoming more constructive. Policymakers need to accelerate this process as exports and rural demand are weak, while burdensome legacies of the downturn (high debt and large non-performing assets, or NPAs) still persist. Policymakers should take comfort from the fact that with favourable terms of trade and idle capacities, risks to inflation and CAD are minimal. Fiscal is now turning supportive As e good news is that with inflation falling to more comfortable levels, fiscal and monetary drag is beginning to unwind. FY16 will be the first year in past 5 years when fiscal impulse to the economy will turn positive. Early trends in government's FY16 expenditure indicate that it is clearly front loading spending, providing the much need push to demand. The risksEmerging markets are characterized by noticeable deterioration in external capital flows (falling foreign exchange reserves) and weakening economic activity. Though starkly evident among commodity exporters, China deserves special attention. While its global economic linkages are well documented, its financial linkages, too, have jumped dramatically as it has accumulated foreign liabilities of $2 trillion. Any escalation of risk can adversely impact domestic recovery through BoP or exchange rate channel, especially when the economy is still weak characterized by poor demand, high NPAs and stretched balance sheets. If there is any rise in risk aversion, it will spill over to India. It is imperative that domestic fiscal and monetary policies turn focus on reviving growth. Two areas of demand weakness need special mention. One is manufactured exports, which have barely grown over the past four years and perhaps will continue to remain a source of demand weakness, much in line with the global trend. Second is the rural sector which, over the past year, has been squeezed by weak output, prices and wages. Of course, if the monsoon is good this year, it will certainly be helpful in terms of output, but the larger point is that the rural economy has been caught on the wrong side of global terms of trade. Global food prices have an important bearing on general prosperity in the farm sector. In totality, the economy is showing signs of recovery and risks of macroeconomic excesses such as a quick run-up in inflation or CAD seem remote in this recovery cycle. Yet, it is still a nascent, and perhaps uneven, recovery, which is yet to become broad-based or a full-fledged virtuous cycle. Businesses and banks still face significant stress in terms of large idle capacities, stretched balance sheets or high NPAs. Domestic macroeconomic policies need to step up their support to the economy.(Edited excerpts from Edelweiss Securities’ report, Economy-A step across the line)
Read More
