PUBLIC AFFAIR ORGANISATION
Public Affairs Round-up
August 2013 | Vol 1 | Issue 2
Will the rupee end the year above 60 to the dollar?
Fall season for the rupee
Dark times for the power sector
Will the rupee end the year above 60 to the dollar? Subhomoy Bhattacharjee, deputy editor, The Indian Express
The options for the Reserve Bank of India (RBI) and the finance ministry have dropped off considerably since June 19 when US Fed chief Ben Bernanke signalled that the quantitative easing policy could begin to ease off. The RBI on July 15 moved two key interest rates â€” the marginal standing facility and the bank rate to 300 basis points above the repo rates to make the rupee costlier to punt on. A week earlier, again a Monday, it cut room for banks to carry out proprietary trading in the currency futures, exchangetraded currency or options markets. This means it has crimped the size of the rupee derivatives market temporarily. The options now include: a) More of the same, ie, raising rates further and/or squeezing market volumes b) Making it mandatory for exporters and those raising foreign debt to bring their foreign currencies back home c) Egging on banks to offer higher interest rates on nonresident foreign exchange denominated accounts d) Raising of forex borrowing on government or public sector bank accounts
headed and how fast. The markets too have an estimate. This is reflected in the one-month futures in the currency markets, all of which were trading above 60 at the time of writing. If the RBI too is comfortable with that and focuses instead on the volatility in the markets, then it is unlikely to do too much. Selling dollars to cut down intra-day swing is what it would aim at.
Does it have the reserves to do so? At $280 billion, the bank is running a cover of less than seven months for imports, so the maximum it could deploy at any stage is less than $30 billion. Among BRIC countries, this is the smallest. Brazil and Russia, for instance, have 19 monthsâ€™ cover (BofA estimates).
To take a call on any or all of these, the RBI will obviously be guided by an underlying estimate of where the rupee is
To cut down short-term volatility, however, that would suffice. This allied with options a) and b) would be the RBI’s arsenal.
quasi-sovereign banking bases abroad, to guide movements in NDF but those have not delivered.
Options c) and especially d) could, however, become necessary if the fiscal conditions – namely the balance of payments – worsen. India ran a current account deficit of 4.8% in FY13 and estimates for FY14 are 4.3% to 4.5 %. This means an uncovered liability of $83 billion to fill up through portfolio and direct investment, besides remittances. Worries on India not pushing growth enough to earn the money to finance this gap has piled on top of money seeping out from emerging market economies to pull the rupee down.
This brings us back to the connection between the rupee and the behaviour of the economy.
Raising interest rates is expected to make debt flows stronger as the differential with rates obtaining in developed markets widens. But the higher rates could make equity flows weaker. Lower interest rates mostly signal an economy with better growth possibilities and, so, robust equity markets. The options for sovereign bond are unlikely to be used immediately as it will be rated and this will set a ceiling for sub-national entities. A public sector bank-led effort to mop up some funds from abroad is the more likely alternative, if at all.
Trends in Indian monetary management The current tensions in the rupee market have emerged principally from the rising share of foreign trade in India’s GDP. It is more than 40% of the GDP of $1.8 trillion. The Indian banking system has been slow to adapt to the requirement of this market, principally the need to hedge currency bets. The RBI has run a generally closed market that focused only on providing trade credits and discounting of bills of exchange. It had not factored in the need for a currency hedge.
There are two lines of argument for the RBI to grapple with. A fall in the value of the rupee, some are convinced, will help. A weaker rupee will help services sectors like IT. An early indication of this was Infosys’ results. It released earnings in line with forecasts, the first time after several quarters, buoyed by a 9% dip in the rupee since June 2013. All such firms earn in forex and pay in rupees. In the manufacturing sector, too, the rupee can help. A cheaper currency means Indian goods will be cheaper abroad. This is significant as India has faced competition from China in this sector due to the labour cost advantage that the latter enjoys. A sustained dip in the rupee of this magnitude can be a game-changer for Indian factories. If entrepreneurs are convinced that the rupee will stay thereabouts with the cost advantage vis-a-vis other Asian economies, it can change the face of Indian manufacturing and create jobs. But the key here is to ensure that capital-labour productivity should not dip off. For the government, this helps instead of offering costly tax set-offs to myriad sectors. Budget FY14 projects total direct tax revenue foregone on this head as Rs 1,13,471 crore or about 9% of total tax receipts. But on the way there are short-term pains. The elections are getting closer and these pains can be expensive.
So, in 2000, the onshore currency market with only the USD-INR and Euro-INR pair available did business of just $2.7 billion. As trade diversified, importers and exporters consequently moved abroad to find ways to cover their risks. The non-deliverable forwards (NDF) market in the rupee sprang up where the underlying was the quote for the rupee in the NSE, but the trades were squared off in US dollars. The market developed in Singapore and then Dubai too joined the party. Also, in 2007, the government imposed a securities transaction tax on the local market that pushed volumes abroad by the shovel-load. By the time the domestic banks moved in to take positions in the currency, the action had shifted abroad. In June 2013, for instance, the total size of the daily onshore currency market was about $40 billion. But Singapore itself does business of close to $25 billion in the rupee NDF market. The 24-hour currency trading cycle is putting pressure on managing the rupee by the RBI. Interference in the exchange rates runs the risk of importing inflation and worsening the fiscal deficit. The RBI has in the past tried options, including setting up
Fall season for the rupee The global economic headwinds and India’s slowing growth have buffeted the rupee. What are its prospects as we get into a difficult second half of the year?
Weekly closings 54.2688 April 2
53.8088 April 30
55.965 May 28
59.675 June 25
56.4525 June 4
58.395 June 11
59.5225 July 1
60.615 July 8
54.385 April 23
55.415 May 21
58.7725 June 18
59.895 July 15
» India is a net commodity importer; a weaker rupee will widen the current account deficit. » Fuel price will rise, raising prices of essentials in turn. A weak rupee will increase the burden of oil marketing companies, which will be passed on to consumers. » Those studying abroad will have to shell out more. Expenses, including fees, will shoot up. » Foreign travel plans will be hit. Tickets and hotels will get costlier, so will shopping and sightseeing.
What RBI is doing » Hiking lending rates for banks and sucking Rs 12,000 crore out of the system to reduce room for speculation on the rupee. » Marginal Standing Facility rate, which allows banks to borrow money from the central bank at a higher rate in times of a liquidity crunch, was raised to 10.25% from 8.25%.
Source: Bloomberg; all dates in FY 2013
All-time low: 61.21, intra-day on July 8
I believe, due to
Causes » A surge in gold imports, leading to loss of precious foreign currency, has created pressure on the rupee. There was a sudden spurt in gold imports to 150 tons per month in the first two months of this fiscal from 75 tons per month in the previous fiscal. For 2012-13, India’s gold import bill was $55 billion. » Fear of US Federal Reserve tapering its quantitative easing hit all asset classes. Currencies of all emerging markets – Indonesia, Thailand, Brazil, India – have depreciated. » Reserve Bank of India reluctant to intervene initially.
Federal Reserve Chairman] Ben Bernanke’s statement and some other factors, all countries with current account deficits have taken a hit on their currencies. But that does not mean the rupee will continue
» Reduction in foreign institutional investor inflows as the rupee’s slide has squeezed their margins.
FII outflows (in Rs crore)
misinterpretation of [US
Source – SEBI (Includes equity & debt)
* Till July 17, 2013
to depreciate. The rupee will find its level. We are concerned about the volatility. - P Chidambaram, finance minister
Dark times for the power sector Kandula Subramaniam, Associate Editor, Outlook Business
It is a sort of a paradox. On the one hand, the Indian power sector is adding generation capacity. On the other hand, the sector’s financial losses keep increasing. At a time when the country’s total power capacity crossed the 100,000 MW mark, the financial losses of the sector at the state utility level were close to Rs 2 lakh crore. revenues and costs don’t match. Buying electricity from other sources like central utilities adds to the costs of a loss-making state utility. The state utility ensures that payments are made to the central utility from its existing revenue stream. In other words, part of the revenues meeting one form of costs can be diverted to meet the additional payment expenses arising out of buying electricity from the central utility. This is how generation utilities are surviving and investments are being made in the form of capacity addition. And this is why financial losses are mounting as the revenues of state utilities are not increasing. But this capacity addition is far behind actual demand. Here’s a fact that many are not familiar with. Right up to the mid-1980s, the Indian power sector was seen as a social service. Even under the law, state utilities were not required to make profits. In fact, the ruling legislation required state utilities to meet their costs “as far as possible”. In the Indian power sector, it is the state utilities that directly deal with the retail consumer. Since they were not required to even break even, electricity lines were drawn out with different objectives. One of the prime objectives in the ’60s and the ’70s was to ensure that villages had access to electricity in order to irrigate land. As an indirect fallout of the green revolution, low-tension electricity lines were drawn to villages so that they could pump water and irrigate land. While this objective was noble and had social relevance, what really happened on the ground was a disaster that is yet to be rectified. There was no account of how much electricity was being used for the farm sector as it was not metered. Electricity meant for agriculture was being stolen to run small industries. The malaise of power theft spread from rural areas to smaller towns and cities. Investments have come in because the country is starved for electricity and faces huge shortages of it. Most of these investments have been made by either state generation utilities or Central-Government-owned ones. State utilities do not have a payment risk as they have an assured offtake but, more importantly, they are owned by the state government itself. In other words, the generation utilities get adequate payments to keep afloat. Central utilities, on the other hand, have firm power purchase orders with several states and their payment risk is divided among these states. It needs to be mentioned that a loss-making entity doesn’t mean that it doesn’t have a stream of revenues. It is just that its
At the state utility end, what happened was unprecedented. As there was lot of accounted-for power being sold, this either got reflected in sale to agriculture or on to another category called loss on account transmission and distribution (T&D). Now, any electrical engineer would tell you that there is some technical loss that happens when electricity is transmitted through wires. This can be in the region of 3%-9% of electricity distributed, depending upon the quality of wires. However, states reported in the region of 40% to 70%. In other words, around only 30% to 40% of the electricity was being billed! No matter how many interventions were made, this legacy continues, even though the number on T&D losses may be slightly on the lower side now.
What is important to understand is that the subject of electricity has become very political. It is very difficult to charge people for what they consume when they are used to freebies. With rural areas being a popular vote bank, no political party can take the risk of unpopular decisions. An ‘unpopular’ decision taken by one party is promised to be reversed by the opposition party. That is how the Congress returned to power in Andhra Pradesh in 2004, by promising free power to the agriculture sector. The problem is not in subsidising some deserving sectors. The real problem is that the subsidy promised to the state utility – that offers power at concessional rates to certain segments of society as a political compulsion – is never paid.
That is why losses mount. You can’t increase rates and not get compensated for providing subsidised electricity. And if you want to increase rates, which segment bears the brunt? It can’t be the rural sector, neither can it be the industrial sector as a rate hike for it would raise input costs and render their products uncompetitive. So the dagger has to fall on the hapless domestic consumer. But is this also politically feasible with some form of elections in states always around the corner? Which government can justify high power rates but no electricity?
Policy Updates New cyber security policy released Union Communications and IT Minister Kapil Sibal recently released the National Cyber Security policy. The policy aims to facilitate a secure computing environment and enable adequate trust in electronic transactions. The policy document also outlines a roadmap for a comprehensive, collaborative and collective response to deal with the issue of cyber security.
New coal regulator approved The Union Cabinet has approved the setting up of an independent regulator for the coal sector and also approved the introduction of the Coal Regulatory Authority Bill, 2013, in Parliament. The regulatory body will help in the conservation of coal resources and manage the concerns of all stakeholders –coal companies, coal-consuming industries (power, steel, cement) and coal-bearing states, as well as people associated with the industry.
Crackdown on ponzi schemes With amendments in securities laws promulgated, the Securities and Exchange Board of India (SEBI) would have the power to regulate any pooling of funds under an investment contract involving a corpus of Rs 100 crore or more, attach assets in case of non-compliance and the SEBI chairman would have the power to authorise search-and-seizure operations as part of the crackdown on ponzi schemes.
Tighter sports regulations drawn up A revised draft National Sports Development Bill 2013 was prepared by the Ministry of Youth Affairs and Sports and presented to the minister of state (independent charge) on July 10. Among other things, responsibilities have been imposed on the National Olympic Committee that include adhering to the Olympic Charter, bidding for international multi-sport events, setting up of a mechanism to address grievances, conduct National Games at regular intervals, constitute the Athletes Commission and function as a public authority under the Right To Information Act.
New VAS guidelines in place The Telecom Regulatory Authority of India has issued directions to service providers on procedures for providing value-added services and their deactivation in order to protect
consumers’ interests. The regulator, in a partial modification of directions, asked service providers to implement a uniform procedure for taking explicit consent of the consumer for activation and deactivation.
‘Implement APMC laws in all states’ The Committee of State Ministers In-Charge of Agriculture Marketing to Promote Marketing Reforms has called for an effective implementation of the Model APMC Act in all states. The committee submitted its final report to Agriculture Minister Sharad Pawar. It recommended multiple and competitive marketing channels, an independent regulator to encourage private investors, the need for viability gap funding to attract private investment, higher investment in marketing infrastructure, waiver of market fees on fruits and vegetables, an independent district-level authority for registration and dispute settlement, and grading units with trained manpower.
More students for higher education India will substantially increase the number of students in higher education over the next seven years. A presentation made by the HRD Ministry to the Consultative Committee indicated that the Rashtriya Uchchatar Shiksha Abhiyan will increase the gross enrollment ratio from 18% to 30%. The scheme, estimated to cost Rs 99,000 crore, will include other existing schemes in the sector. The highlight will be that Central funding to institutions will be through the State Council of Higher Education. Moreover, funding by the Centre will be up to 90% and will be available to even private institutions.
Health pact signed with UK institute The Department of Health Research, Ministry of Health and Family Welfare, and the Central Government have signed a memorandum of understanding with the National Institute for Health and Care Excellence, UK, to provide the framework for strategic and technical cooperation between the two countries. The agreement aims to (1) bring modern health technology to people by encouraging innovation related to diagnostics, treatment methods and prevention; (2) translate the innovations into products/processes by facilitating evaluation in synergy with government departments; and 3) introduce these innovations into the public health service through health systems research.
Export benefits announced The report of the committee and suggestions received from the Chambers of Commerce and Industry and Export Promotion Councils have been analysed by the Department of Commerce and it has been decided to include 150 products in the Focus Product Scheme for an incentive at the rate of 2% of the Free on Board value of exports. Items from the engineering, electronics, chemical and pharma sectors have been included in the list. The benefit will be applicable for exports made from August 1, 2013.
National Food Security Ordinance: All that glitters is not gold Aim: Introduced as an ordinance recently, the National Food Security Bill aims to provide food security to the millions that live below the poverty line. Annual cost: Rs 1.3 lakh crore Mechanism: 62 million tons of rice, wheat and coarse cereals will be supplied through the Targeted Public Distribution System (TPDS). The Bill aims to enable access to 5 kg of subsidised foodgrain per person per month. The grain would be available to two-thirds of the people at Rs 3 per kg for rice, Rs 2 per kg for wheat and Re 1 per kg for coarse grain through ration shops.
Does it reach everybody? The Bill’s intentions are noble, and it tries to connect the dots from warehouse to the hungry, but many feel it is merely a gimmick to earn votes during the 2014 general elections. Food rights activists say the Bill leaves out lakhs of Indians who have neither ration cards nor voter IDs.
Security Act 2012 that is not limited to cereals, but includes salt, black gram and other pulses. The state handed over control of ration shops to women self-help groups, panchayats and cooperatives. This corruption-free back-end ensured effective monitoring of goods from warehouse to shop, reducing leakages from the earlier 40% to 4% at present. » The Central Bill does not address the fundamental problem of malnutrition. There are 61 million chronically undernourished children in India, and 8 million suffer from severe acute malnutrition. The Bill does not focus on the right to proper nutrition. » The Bill by itself cannot solve all of India’s food-related problems. Other measures, such as penalties for violators, are needed too.
What is the subsidy burden? Finance Minister P Chidambaram had in his Budget speech provided Rs 90,000 crore as food subsidy, which includes Rs 10,000 crore for implementation of the National Food Security Act. Government estimates predict that the additional annual food subsidy burden would be Rs 23,800 crore. Industry association FICCI said that implementing the Bill might inflate the fiscal deficit.
What are the other criticisms? » The Bill has been opposed by farmers’ bodies, which claim it would lead to nationalisation of agriculture by making the government the biggest buyer, hoarder and seller of foodgrain. Moreover, it might distort incentives for farmers to produce anything other than rice and wheat. » Many are unhappy that the government has chosen the archaic TPDS to distribute the grain. The TPDS is in a mess, plagued with inefficiencies. Pilferage, the rotting of grain and logistics inefficiencies mean many families living below the poverty line never get to see the foodgrain they are entitled to. The TPDS has virtually collapsed in several states due to weak governance and lack of accountaBillity. » It is expensive. Some feel that cash transfers would have served the purpose at lower cost. » One solution could be a state-level reform of the TPDS, with each state choosing a model best suited to it. Chhattisgarh, for instance, introduced its own Food
Number View $12 billion
Rs 59,000 crore
What ArcelorMittal was going to invest in its steel plant in Odisha. It scrapped the project after inordinate delays, problems in acquiring land and securing iron ore linkages. A day earlier, South Korea’s Posco decided to pull out of its $5.3 billion steel mill project in Karnataka, primarily due to delays in receiving iron ore mining rights and opposition from residents, which held back land acquisition. However, Posco will continue with its $12 billion steel mill project in Odisha.
Annual plan size for 2013-14 for Gujarat, which was finalised between Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and Chief Minister Narendra Modi. The plan includes central assistance of Rs 3,979 crore. In addition, Rs 6,000 crore is likely to flow to Gujarat through centrally-sponsored schemes. Thus, overall plan funding from the Centre to Gujarat is expected to be Rs 10,000 crore during 2013-14.
The new foreign direct investment limit in telecom (basic and cellular services), up from the earlier 74%. Up to 49% remains under the automatic route and 49%-100%through the Foreign Investment Promotion Board route.
The new natural gas price set by the Union Cabinet, applicable from April 2014, based on the Rangarajan Committee’s formula. The new price reflects the scarcity value and is in keeping with the ground reality of dearer gas prices, which have a marked regional bias.
Size of loan for which the Centre has signed an agreement with the Asian Development Bank. The money will be used to improve urban services and strengthening project management in several towns in North Karnataka. The agreement is for the third project under the overall facility of $270 million for the North Karnataka Urban Sector Investment Programme. The loan will be used to develop sewerage networks in six towns, and help the rehabilitation and expansion of potable water systems in two others. More than 100,000 households will benefit.
Rs 710 crore
Increase in visa on arrivals (VoAs) in June 2013 from June 2012. In June 2013, 1,062 VoAs were issued as compared to 864 in June 2012. This scheme was launched in January 2010 to attract more tourists from Finland, Japan, Luxembourg, New Zealand and Singapore. The scheme was extended to citizens of six more countries – Cambodia, Indonesia, Vietnam, the Philippines, Laos and Myanmar – in January 2011.
Rs 1,030 crore Approved outlay of the Modified Industrial Infrastructure Upgradation Scheme for the 12th Five Year Plan period. Approved by the Cabinet Committee on Economic Affairs, the outlay sets aside Rs 450 crore for committed liability and the remaining Rs 580 crore for 14 to16 new projects. These include a minimum of two in the North-East for infrastructure upgrades in existing or greenfield industrial clusters.
Sanctions granted under the Pradhan Mantri Gram Sadak Yojana (PMGSY) at 2013-14 prices to Jammu and Kashmir as a one-time dispensation to cover the cost of land acquisition for compensatory afforestation, forest land, trees, private land and structures for completion of PMGSY programmes. This will expedite completion of these projects.
Loan for which an agreement has been signed between India and the World Bank for the National AIDS Control Project IV. The project aims to increase safe behaviour among high-risk groups and contribute to the national goal of reversal of the HIV epidemic by 2017.
Rs 1,646.9 crore Combined value of 16 proposals approved by the Centre on the recommendation of the Foreign Investment Promotion Board in its meeting held on May 10, 2013.
Public Affairs Round-up
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Published on Aug 16, 2013
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