FM maths: $5bn import curbs, $11bn more flows

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It is also set to announce a clutch of measures to curb imports soon, targeting a saving of at least $5.5 billion on the country’s import bill. It is also set to announce a clutch of measures to curb imports soon, targeting a saving of at least $5.5 billion on the country’s import bill.
SummaryIt is also set to announce a clutch of measures to curb imports soon, targeting a saving of at least $5.5 billion on the country’s import bill.

The government on Monday asked public sector oil marketing companies to borrow specified amounts from abroad, deregulated the interest rate for certain deposits from non-resident Indians and urged state-owned financial institutions to go for quasi-sovereign bonds for infrastructure financing, in measures aimed at additional capital inflows of about $11 billion in 2013-14. It is also set to announce a clutch of measures to curb imports soon, targeting a saving of at least $5.5 billion on the country’s import bill.

Finance minister P Chidambaram, who announced these measures first in Parliament on Monday and spelt out some details to the media later, said the current account deficit in FY 14 would be contained at $70 billion, which he estimated would amount to 3.7% of the gross domestic product, and asserted that not only would this deficit be fully and safely financed but, like last year, a small amount would be added to the foreign exchange reserves.

Chidambaram said that in a business-as-usual scenario, the country will receive $64 billion in foreign fund inflows in FY14. Thanks to Monday’s measures, the inflows could go up to $75 billion, which would be sufficient to finance a CAD of $70 billion. “Similar to the red line we drew for fiscal deficit, CAD’s red line of 3.7% to GDP will not be breached,” the minister said. Through measures to reduce import of high-value commodities (duty hikes), the minister hopes to save $1.5 billion in oil imports and $4 billion in gold imports.

As global investors fled emerging markets in anticipation of the US Federal Reserve rolling back its quantitative easing programme, India too suffered in terms of capital flight. So far this fiscal, foreign investment in Indian debt has seen a net outflow of about $5.7 billion.

Measures were announced on Monday to boost inflows as the country’s $280 billion forex reserves were sufficient only to cover about seven months of import bills. Details of steps to reduce import of high value commodities will be presented to Parliament soon.

Sources said the Reserve Bank of India will issue guidelines on the relaxation in external commercial borrowings (ECB), as per which Indian subsidiaries of multinationals will be allowed to borrow from their global parents. Also, businesses that provide aircraft maintenance, repair and overhaul (MRO) services will be allowed to raise ECB, deeming them as airport infrastructure providers. The liberalised foreign borrowing norms could lead to an extra $2 billion in terms of debt inflow this fiscal. The Indian government and the corporate sector together have only raised $32 billion of ECB up to June out of the total $40 billion overall limit permitted by RBI, thereby not warranting a relaxation in the quantum of borrowing.

Incremental flows into NRI deposits will be exempt from the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) requirements, that will boost the dollar availability in the market. NRI deposits will also be exempt from priority sector lending requirements. RBI will also deregulate interest rates for term deposits of over three years under FCNR (Bank) accounts, making these an attractive investment option for NRIs.

Chidambarm also said that sovereign wealth funds (SWFs) will be given an option to invest under the private placement category up to 30% of the Rs 50,000 crore tax-free bonds that select state finance companies will be allowed to issue this fiscal. The finance ministry has, in the meantime, identified 13 entities to raise around Rs 48,000 crore worth tax-free bonds.

Also, state-owned institutions India Infrastructure Finance Company Ltd (IIFCL), Indian Railway Finance Corporation and Power Finance Corporation together are allowed to issue quasi-sovereign bonds to the tune of $4 billion. The government holds 73.72% in PFC, while IIFCL is fully owned by the government. IRFC is a subsidiary of Railways. IRFC will raise $1 billion, while the others will mobilise $1.5 billion each.

Samir Kanabar, partner, EY said India needs huge funds in infrastructure, be it in railways or power. “This is a good time to raise funds from abroad as the rupee has hit rock-bottom. Assuming that the rupee will strengthen in five years, Indian institutions stand to gain as they have to repay less in rupee terms. If the rupee gains 8% over the period, virtually, they have got free funds,” said Kanabar.

State-run oil marketing companies IOC, HPCL and BPCL that are in financial difficulties because of selling diesel, LPG and kerosene below market price, will be allowed to raise ECBs. IOC has been allowed to raise $1.7 billion, while BPCL and HPCL can raise $1 billion each. Fuel retailers have also been allowed to raise another 0.25 billion through trade financing options. According to an oil industry executive, oil marketing companies are unlikely to find the expanded ECB window very attractive at this juncture, considering that their borrowing levels are already quite large with the current servicing costs being as high as Rs 8,000-9,000 crore per annum. However, they may opt for using the facility to swap a part of high-cost domestic loans with overseas debt.

The CAD projection for FY 14 by the minister is more optimistic than those of independent analysts. Crisil, for instance, had put the figure at 4.5% of the GDP. The RBI has, in the first quarter review of macroeconomic monetary developments, said the CAD might have widened again in Q1FY13 after the moderation to 3.8% of the GDP in the previous quarter due to a widening of the trade deficit attributable to a sharp increase in good imports. It, however, expressed the hope that, going forward, the current account would show improvement thanks to the likely decline in demand for imported gold after the tariffs were hiked. “While the CAD may fall in 2013-14, risks to CAD financing have increased with firming up of US yields that caused global bond sell off and capital outflows from EMDEs, including India,” the central bank had noted. In line with this forecast, the merchandise trade data for July released on Monday said gold and silver imports stood at $2.97 billion in the month, down from $4.4 billion in the same period last year.

Last year, the CAD stood at a record $88 billion or 4.8% of the GDP but capital flows through various means were such that after bridging the deficit, $3.8 billion was added to the reserves. In the year before, when the CAD stood at $78.2 billion (4.2% of the GDP), there was, however, a draw-down from the reserves of $12.8 billion.

To contain the CAD, the government had earlier promised a clutch of measures including restraining imports of some identified “non-essential” items including some consumer goods and luxury items, besides compressing demand for oil, gold and silver. Chidambaram said in Parliament on Monday that notifications in this regard would be issued in due course. Government sources had said in case of a few items where there is a huge gap between WTO-defined bound rates and actual (applied) tariffs, the latter would be hiked. Trade analysts say since these items don’t account for a large chunk of our imports, curbing their imports might not be of any great help to curb the CAD. Says Criril: “... if imports have to be brought down to a sustainable level, India will need to rein in its coal imports. While the recent measures by the RBI and government are expected to bring down gold imports by 20-25% in 2013-14, coal imports are expected to rise and cross over $15 billion during the year.”

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