Home » Articles » Will The Five Pronged Government Strategy Steady The Indian Economy
How it helps?
  • Zero maintenance charges
  • Zero fees for demat account opening
  • Volume based brokerage
Reach Us
Learn the art of Investing

Read More >

  • Will the five-pronged government strategy steady the Indian economy?

    Publish Date: September 17, 2018

    Strong capital flight has hobbled the Indian economy. While outflows may not be as bad as other emerging markets, a $10 billion outflow in the first quarter of this financial year has been a sucker punch to the system. Contagion fears among foreign investors has consequently roiled the current account deficit (CAD) and the strength of the rupee.

    Keeping the current turmoil in mind, the Indian government on Friday sounded out a raft of measures to increase capital flow in the country. The initiatives announced to keep CAD and rupee crises in check include:

    1) Mandatory hedging conditions for infrastructure loans (ECBs) will be reviewed: If the hedging clause is not mandatory, the cost of borrowings will become lower, enabling companies to raise more loans in US dollars. Taking external commercial borrowings (ECBs) will become more attractive than domestic borrowings. Unhedged borrowings can be a shot in the arm for infrastructure companies, who have recently suffered financing constraints in the domestic market.

    2) Maturity of ECBs availed by manufacturing sector reduce to one year: Earlier, the maturity period was three years, which increased the borrowing costs. Now, with a shorter maturity period, manufacturing companies can take short-term loans up to $50 million at a lower rate.

    3) 20% of FPI’s corporate bond portfolio to a single corporate group and 50% of any issue of corporate bonds will be reviewed: Removing the upper limit is likely to boost capital inflow. People looking for high yields may opt for NCDs, especially in real estate companies, according to a Business Standard report.

    Related read: Emerging markets have taken a beating—All you need to know

    4) Exemption from withholding tax for masala bonds issued in FY2019: Masala bonds are issued by an Indian company overseas. The difference is that the bonds are denominated in India rupee instead of the overseas currency. The government’s decision to not retain any tax on returns will boost capital inflow from overseas markets. That’s because withholding even a tiny percentage of tax does lower an investor’s proceeds. It’s a win-win for both the company that’s issuing and the investor. The company can raise more money, while absence of any tax cut would improve an investor’s end returns.

    5) Removal of restrictions on Indian banks’ market making in masala bonds, including underwriting: This is a shot in the arm for the banking industry. Now, banks don’t have to get in touch with foreign stock exchanges and underwriters to issue masala bonds. This may ease the process of offering rupee-denominated bonds to overseas investors.

    The government is also looking to reduce its non-essential goods import and boost exports. But it has yet to divulge which goods fall under the ‘non-essential’ bracket. The dispensary will seek advice from different ministries and pore over the international trade agreement before it announces the list. New Delhi, though, will have to be careful because there may be reprisals (read: hiked tariffs) from affected countries.

    Efficacy of the measures

    Media reports suggest that these measures is likely to result about $8-10 billion investment from overseas investors.

    We also feel that the central bank may look to adopt aggressive forex intervention and allow currency swap for oil marketing companies. These measures are likely to stabilize the rupee, at least for the short-term. But the pressure on the rupee is unlikely to alleviate until the ravaging trade wars and global crude oil prices settle down.

    Meeting the fiscal target, however, still appears to be an uphill task. The government reiterated its stance of meeting its fiscal deficit target of 3.3%. It remains hopeful of raising enough money through direct tax revenues and divestment programmes. But, the overall picture looks uncertain. We would have to keep an eye on pace and quality of revenue and capital expenditure, GST revenues (we are currently behind the required run rate) and progress on divestments. Any slippages would result in a burgeoning fiscal and current account deficits.

    The one big positive is that the government has refrained from announcing any root-and-branch overhaul. That’s because instead of making any knee-jerk decisions, it needs to focus on maintaining macro stability. The government needs to address issues such as the twin deficit challenge, inflation and consumption-savings behavior in order to improve the underlying fundamentals of the economy.


    Also read

    Click here to go back