India’s Tarnished Gold Gifts
Indian stocks with deflated valuations attracted a brimming $20 billion in foreign inflows on the same percent MSCI advance in 2012 as the retail and banking sectors were further opened to allay worsening economic indicators. GDP growth is at a decade low around 5.5 percent and the current account gap is at the same extreme as a portion of output on flagging manufacturing and services exports and heavy energy and gold imports. The precious metal demand has spiked despite the softer world price for traditional cultural and inflation hedge reasons, with the wholesale cost index still hovering at 7 percent to prevent decisive central bank easing. To cover the structural trade deficit the inward portfolio investment ceiling has also been raised for government and corporate debt, with FDI at only 1 percent of GDP a meager capital account contribution. Outward FDI has been a different story as Indian companies spent over $10 billion on acquisitions, often citing better prospects abroad than at home. State oil giant ONGC recently bid for holdings in Kazakhstan as private family groups like Tata argue that damaging domestic policies force them overseas. The recent passage of a bill allowing new banking licenses satisfies a longstanding desire from the conglomerates and also lifts the foreign ownership cap to 25 percent, but approvals may come slowly with existing competitors hit by a wave of non-performing loans requiring workouts, alongside high-profile bankruptcies such as airline Kingfisher. Contingent liabilities could endanger the medium-term fiscal plan to honor legal limits and avoid an immediate sovereign rating downgrade by bringing the fiscal deficit under 5 percent of GDP. The ruling coalition remains reluctant to introduce a general sales tax or further curb food and fuel subsidies before upcoming elections, although advanced technology has aided the push for less fraud-prone direct cash transfers. Rahul Gandhi is set to lead the Congress Party in the next national race but the opposition BJP may pose a strong challenge following the third consecutive win of Gujarat chief minister Modi in December. He regularly holds investor summits to trumpet a business-friendly approach, but involvement in past anti-Muslim violence undermines broader political appeal.
In Indonesia, where shares ended last year barely positive, the 2014 presidential succession derby has already begun with candidates jostling over natural resources control as a wedge issue. The central administration has retaken post-Suharto local prerogative with a set of new mining rules and the decade-old oil and gas law was recently declared unconstitutional. Jakarta’s governor hiked the minimum wage 45 percent after union marches blocked the capital’s main roads. Carmakers could benefit from higher disposable income as consumption continues to support 5 percent GDP growth, while poorer rural areas are dealt a blow from lower coal and palm oil exports to China darkening the current account picture.
