Sunday, November 27, 2011

FDI in Retail—A Mixed Bag...

The Indian government has finally paved the way for the entry of global retail giants into India. Foreign direct investment (FDI) of up to 51 per cent has been allowed in multi-brand retail. Simultaneously, the FDI limit in single-brand retail ventures has been increased to 100 per cent; the government had in February 2006 permitted 51 per cent FDI in single-brand retail.

The clearance comes with several riders; multi-brand foreign retailers need to make a minimum investment of $100 million in the country. They would be allowed to set up shop only in cities with a population of more than 10 lakh as per the 2011 Census; there are about 55 such cities so it means big retail chains can move beyond the metros to smaller cities. Foreign investors will be required to put up 50 per cent of total FDI in back-end infrastructure. Such infrastructure will include capital expenditure on all activities, excluding that on front-end units. Expenditure on land cost and rentals will not be counted for purpose of back-end infrastructure. Retailers will need to source at least 30 per cent of manufactured/processed products from small industries. However, there will not be any obligation on the part of retailers to source agricultural produce such as fruit and vegetables. The Government has also retained the first right on sourcing agricultural produce. In terms of single-brand retail, just one important condition has been added to the existing one. It makes 30 per cent sourcing from small and medium enterprises mandatory, as soon as the FDI limit exceeds 51 percent.

The Government believes opening up of FDI in multi-brand retail trade and further liberalisation of single-brand retail trade will facilitate greater FDI inflows besides additional and quality employment. It is being assumed that it would make eminent commercial sense for the retailers to source fresh produce locally. It is unlikely that retailers would undertake large-scale imports of agricultural products. It will also bring a lot of benefits to the consumers and farmers in terms of quality, price and removal of inefficiencies in the agricultural sector. The Government has maintained that farmers will get higher remuneration and FDI will help in the development of much needed logistics and cold chains in the country. All sections of Indian industry of course have welcomed the move as any such investment spurs up industrial activity.

Global chains may face problems in opening stores in 28 of the 53 cities which have been thrown open to retailers. A long deliberation had been keeping the decision on hold as political opposition as well as store owners voiced their concerns on the fate of the small retailers once global giants like Walmart, Carrefour and TESCO open stores next doors. However, there doesn’t seem to be much reason for such extreme concern. The Indian consumer is a quirky brand itself; after the initial excitement dies down most consumers may remain loyal to their very own corner store. We have seen brands like Spencer’s close shop in localities where thriving traditional shops existed, even in more elite localities in metros. Street fashion shops continue to be crowded despite the opening up of several clothes retailers in the metros. Given the large scope and size in the retailing business in India there is every possibility that both parties face initial difficulties but eventually gain some mutual benefits.

Tuesday, November 15, 2011

RBI Adjusts Stance to Reflect Deepening of the Global crisis...

The RBI formulated its second quarter review of the Annual Monetary Policy for the year 2011-12 against a backdrop of decelerating domestic demand and growth, led by global economic sentiments. A slew of regulatory and developmental policy measures have been announced; these include new products to widen and deepen the financial markets and measures to increase financial inclusion and strengthen the banking system. The most important measure however, was the deregulation of the Savings Bank Deposit Interest Rate, which so far remained the so called last bastion of interest rate regulation in India. Though this could lead to both intra- and inter-bank deposit migration in the short-term, it is expected that the move will lead to efficiency in banks’ credit-deposit management and would benefit a large number of small savers in the country.

As inflation expectations are likely to be controlled due to previous policy measures as well as the slowdown in both global and domestic growth and demand, RBI has now shifted its stance from hawkish to neutral. This has provided significant breathing space for domestic financial markets and corporates who have been facing shrinking profits due to shrinking global demand, rising borrowing and input costs as well as fluctuations in foreign exchange rates. India’s October exports slackened to about 11 per cent from a peak of 82 per cent growth registered in July, widening the country's trade deficit to a four-year high. India’s industrial output growth for September has also decelerated, for the third consecutive month, to a mere 1.9 per cent the lowest reading in two years. Going forward, the developments—related to the sovereign debt crises across the globe, in the global financial markets and the actual trajectory of both global and domestic commodity prices—would determine necessary changes in the policy stance. The highlights of the Second Quarter Review of Monetary Policy 2011-12 is presented here :E-UpDates-November2011


Wednesday, November 2, 2011

Double Policy Impasse — Near Double Dip

The global economy was feared to be on the brink of another recessionary phase, pulled down not only by stalling demand and growth arising from persistently high levels of unemployment in major advanced economies, but this time precipitated by a dearth of business and consumer confidence as showing up in various confidence indexes across the globe. This crisis of confidence, as it has been termed, sparked off by sovereign debt crises and a series of rating downgrades of the US and the Euro zone countries, intensified as policy making reached an impasse on both sides of the Atlantic. Unlike the first phase of the global financial crisis when policy makers had unanimously called for expansionary policies to avert crisis, this time around there is a clear divergence in policy stance of various stakeholders and analysts leading to standoffs on critical issues like raising the ceiling on US government debt or the Greek bailout.

In mid-May US national debt approached its statutory limit of $14.29 trillion and measures were taken to stave off a default until August 2. (The US government is able to auction off new debt typically in the form of US Treasury securities in order to finance annual deficits. However, instituted with the Second Liberty Bond Act of 1917, the debt limit places an absolute cap on this borrowing, requiring congressional approval for any increase or decrease from this statutory level.) A political impasse over reduction in defense spending and tax hikes that could be biased against the wealthy and tax reforms involving fewer deductions and loopholes for both individuals and businesses held the global financial system to ransom. A legislation to raise the US sovereign debt limit by at least $2.1 trillion through the Budget Control Act of 2011, was finally enacted a day before the threatened default. The deal puts in place measures to cut the US deficit by $2.1 trillion over 10 years with initially about $100 billion reduction when the deal passes and another $1.5 trillion to be agreed upon by the end of the year; the first group of spending cuts apply progressively over the years to the discretionary programs that are approved annually, with automatic triggers for cuts if the targets are not adhered to. Adding to the financial market turmoil, in early August the US lost its highest safety or AAA credit rating, potentially further increasing funding costs for US public debt and the cost of borrowing for consumers and investors; this triggered off a slide in the US and global equity markets and this time around even emerging markets were not spared. However, strong growth figures released last week have for now pushed back fears of another recession, however concerns loom large that the austerity measures taken to avert the debt crises though beneficial for reducing government debt, are in fact debilitating for growth and employment. Unless there is a significant expansion in business and consumer confidence and in private demand in response to these measures, recessionary tendencies may only aggravate.

The end of the policy impasse on the other side of the Atlantic doesn’t seem to be in sight. Escalating concerns over sovereign debt default in the Euro zone and in particular potential losses to banks holding this debt greatly impacted global financial markets and spilled over to economic sentiments across the globe. Differences within economies undergoing adjustment and those providing support impeded achievement of any quick solution; this precipitated a loss of consumer and business confidence. An emergency three-pronged deal was finally reached last week to fix the Euro zone's debt crisis: (i) Private banks holding Greek government debt which now stands at about 144% of GDP, will accept a write-off of 50% of their returns; (ii) the main euro bailout fund - known as the European Financial Stability Facility (EFSF) - is to be boosted from the 440 billion euros set up earlier this year to 1trillion euros; (iii) around 70 European banks will be required to raise about 106 billion euros in new capital by June 2012. It is hoped that this would help shield them against losses resulting from any government defaults and protect larger economies like Italy and Spain from the market turmoil. However, the Greek PM’s unexpected decision of calling for a referendum on the bailout agreement, whereby the people of Greece would decide whether or not the packages of austerity measures needed to qualify for bailout payments would be implemented, has now shocked the global economy.