FDI Reforms Positive in Short-run Ind-Ra-Mumbai-17 July 2013: India Ratings & Research (Ind-Ra) says the recent regulatory decision on foreign direct investment (FDI) will help attract FDI in India. Increased FDI inflow will help arrest INR depreciation in the short term. A continuous FDI inflow in the medium-to-long-term will alleviate some current account deficit (CAD) financing issues. India’s increasing dependence on volatile portfolio and debt-related capital inflows to finance its CAD is a major weakness for INR. Although FDI cap on most sectors remains unchanged, major benefit will originate from the route through which FDI is allowed. In the 11 sectors, on which the decision has been taken, FDI will flow from the automatic route as against the earlier foreign investment promotion board (FIPB) route. While in the FIPB route, companies have to submit proposals to FIPB and FDI inflow is subject to approval, in the automatic route a domestic company can sell its equity to or bring in fresh equity from a foreign partner. Automatic route thus reduces the time of FDI inflow. Telecom (basic and cellular) and insurance are two sectors likely to benefit from the recent decision. This is because the FDI limit in telecom, which was earlier 74% through the FIPB route, has been increased to 100% (49% under the automatic route and remaining through the FIPB route). The FDI inflow in the telecom sector would depend more on the regulatory environment than the change in the FDI route. The FDI limit in the insurance sector is proposed to increase to 49% through the automatic route from 26% through automatic route, subject to parliamentary approval. Although, Ind-Ra does not expect FDI inflow to start immediately, the decision on FDI and the recent liquidity tightening measures of the Reserve Bank of India can help strengthen the currency. INR appreciation, in the short term, is likely to be on change in sentiments (as observed in the second half of September 2012). However, a favourable impact in the medium-to-long-term will depend upon continuous reform measures. A strengthening currency will not only support the leveraged corporate sector, but also help the government to adhere to its fiscal consolidation plan. Government’s subsidy burden, especially in the oil and fertiliser sectors, is susceptible to exchange rate variation. In the last two fiscals, contrary to economic theory, despite INR depreciation, India’s exports have suffered because of the lack of global demand and a virtual halt of iron ore exports. Simultaneously, the import of coal, crude oil and gold has increased. While some of these shocks are exogenous to India, domestic issues have also aggravated currency depreciation. Also, tapering off of US Fed’s monetary stimulus has resulted in capital flight and affected INR.
Posted on: Wed, 17 Jul 2013 17:27:16 +0000
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