India’s Lachrymose License Raj Litany
Indian shares struggled for positive ground as Q1 GDP growth came in at a decade low of 5.3 percent, 4 percent off the preceding period, with the Finance Minister blaming poor manufacturing data in particular. The rupee fell through 55 to the dollar as the central bank ordered exporters to convert half their receipts to the currency and otherwise intervened with over 250 billion in reserves on hand. Sentiment was already fragile after S&P slashed the sovereign rating outlook to negative placing in jeopardy its bottom investment-grade status. The agency pointed to backtracking on sector opening and tax policies and consecutive 8 percent fiscal deficits bringing public debt to 70 percent of GDP. To tackle the gap the government again announced energy subsidy cuts that were met with widespread labor union protests. Initial proposals to go after offshore-channeled portfolio and direct inflows though Mauritius and other tax havens were delayed but investigations into previous deals such as the argued $3 billion bill for Vodafone’s local acquisition will continue. After the reversal net debt and equity allocation resumed, aided by decisions to allow individual investor access and raise the institutional corporate bond ownership ceiling. The former shift may not dramatically increase interest in the near term as expatriates and foreign retail players already manage entry through ETFs, while the latter asset class has sparked jitters with several defaults as $3.5 billion must be repaid by borrowers through year-end according to traders. Convertible bond prices have also slumped as analysts foresee a wave of restructurings mostly involving maturity extension at first. On the macro front food-driven inflation remains at double digits precluding monetary stimulus even though the benchmark rate was recently reduced. In external accounts the current account deficit is core Asia’s worst at 4 percent of GDP and is further pressured by the need to diversify fuel import sources with Iranian sanctions and the outward FDI push by big family conglomerates promoting competitive alternatives.
Telecoms license holders who had their authorizations revoked in a sweeping court judgment have been particularly reluctant to reaffirm their presence. Many decry the “policy paralysis” since the ruling coalition was re-elected and prefer to postpone major commitments until the next contest in 2014 which will likely feature a new leadership generation. With one-third of the population still in poverty by official statistics social spending remains a priority despite evidence of huge waste in both urban and agricultural programs. Industrial exports get support and free trade pacts are now high on the agenda including with traditional enemy Pakistan. Renewable power is another focus with global technology transfer potential with $10 billion in activity in 2011 alongside the controversial bilateral nuclear cooperation pact with the US which thus far has yielded sparse results. Experts believe that solar is particularly promising and can be spun into gold amid unalloyed commercial and household appreciation of it value.
