India’s Reluctant Retail Establishment
Indian retail shares lifted briefly in an attempt to propel Asia’s worst performing exchange, but then reversed after the government delayed granting foreign chains won greater ownership rights provided they invest at least $100 million and source locally through small firms. The change could bring in $20 billion in FDI to help offset the current account deficit as the portfolio component again shows outflows, according to proponents from the ruling Congress Party coalition expected soon to name Rahul Gandhi as leader next year after his mother’s illness. The opposition BJP has attacked the proposal as destructive for family shops and farmers already suffering from subsidy cuts and inflation which finally settled at single-digits following relentless central bank rate increases. GDP growth has petered to 7 percent and the rupee is off 13 percent against the dollar this year prompting “anti-volatility” intervention. The central fiscal deficit is above target at 5 percent of GDP and the foreign institutional bond allocation quota has just been hiked further to $60 billion to expand government paper allocation. Banks and corporates with the crowding out have resorted to borrowing abroad and face heavy repayments next year. Companies owe $15 billion next March by rating agency tallies, and Moody’s recently downgraded the financial sector on an anticipated spike in non-performing loans and margin squeezes that may result from the end of minimum-deposit rates. Listed firm earnings are at their lowest since the 2008 crash aftermath and family conglomerates have sold off on costly acquisitions and diversification strategies and refusal to cede insider control. In a notable departure responding to the criticism an unrelated executive will become the next head of the country’s biggest business Tata.
To the south on the subcontinent Sri Lankan stocks have also been in the doldrums after a banner 2010 as “peace dividend” hype fades despite 8 percent economic growth on reactivated tourism, agricultural and industrial capacity. The former Defense Minister has been sentenced for coup-plotting and a new nationalization law reflects the regime’s authoritarian instincts. The currency was officially depreciated with a likely pass-through on 5 percent inflation, as private sector credit continues to rise at a double-digit clip. Multilateral lenders have urged the elimination of tax holidays to help close the chronic budget gap, but authorities have hesitated. Asian frontier market observers offer as a contrast Mongolia, where a 5 percent deficit cap has been enshrined beginning in 2012 with massive metal revenue infusions. Inflation there is also running at 15 percent and NPLs remain high after a 2009 IMF rescue at near one-tenth of portfolios. An inaugural sovereign bond is on tap before parliamentary elections in six months often accompanied by controversy and violence that have tarnished appeal.
