Outlook down on more India red-tape and bureaucracy

On the surface the outlook for shares in India is muted as the country’s economy is weighed down by an indecisive political leadership and a monolithic bureaucracy that is adept in tying in knots every policy initiative. Even seasoned businessmen long used to the red-tape are now finding the hurdles insurmountable and stifling.

Last September, in its first major reform move in eight years, Prime Minister Manmohan Singh’s government opened the $500 billion (Dh1.8 trillion) domestic retail market to global supermarket giants. The announcement, made against teething opposition from parliamentary allies within the ruling coalition, was seen as the first constructive effort to revive investment in the rapidly slowing economy.

Although companies such as Wal-Mart, Carrefour and Tesco, which had been lobbying New Delhi for years to set up shop in India, were elated by the government measure, their enthusiasm has now faded. More than six months after the policy relaxation, not a single global supermarket chain has progressed beyond the drawing board.

A series of riders imposed in the policy such as a minimum investment of $100 million, and a requirement to put at least half of the total investment into back-end logistics such as warehousing and cold storages, are proving big hurdles. Political risk emanating from threats by the main opposition group led by the Bharatiya Janata Party to revoke the policy to open up the supermarket sector is also causing unease for companies.

Slow annual pace

“We remain cautious on India equities,” investment bank JPMorgan said in a research note to its clients. “There are limited policy stimuli — fiscal and monetary — available to boost growth over the near term. Our portfolio stance is defensive.”

India’s nearly $2 trillion economy, Asia’s third-largest after China and Japan, grew 4.5 per cent in the December quarter in the slowest annual pace in nearly four years, and less than half the rate of expansion until two years earlier. There is hope the growth will pick up to more than six per cent in 2013-14, but this will depend on more forceful implementation of revival measures.

The widely tracked top-30 Sensex was the third worst performer among major Asian indices during January-March, sliding 3 per cent — the biggest three-month drop since the December quarter of 2011. Only Malaysia and Hong Kong had lost more in the first quarter.

“There are so many lingering issues with India at the moment,” said equity strategist V. Venugopal. “The government is increasingly acting like a lame-duck, betraying conviction to pursue difficult policies needed to lift the economy. A sign of how insecure businesses feel can be seen in the rising outflow of investment to overseas.”

Two large multi-billion dollar foreign direct investment proposals, by L.N. Mittal of Arcelor-Mittal and South Korea’s POSCO, have been stuck in bureaucratic red-tape for many years with no chances of any quick resolution despite sustained efforts by the foreign groups to persist with their plans.

Vulnerable

As a consequence to the long delays to such investment plans, a new trouble spot has opened up, making the country more vulnerable to swings in hot money flows. India’s current account deficit soared to a record $32.63 billion in the December quarter, or 6.7 per cent of GDP, from $22.3 billion in the three months ended September.

The data, which was released after the markets had closed for the week, would have an impact on stocks and the rupee when trading resumes on Monday.

However, despite the economic weakness, foreign institutional investors have been heavy buyers of Indian shares and debt this year. Their net purchases between January and March totalled a combined $12.7 billion, according to the Securities and Exchange Board of India, with flows into stocks alone contributing $10.3 billion.

There is little doubt that the benchmark Sensex would have slumped but for the foreign fund support. Domestic financial institutions have been sellers of more than Rs410 billion during the first quarter of 2013, and this trend is unlikely to change in the near term.

Competing economies

“If the foreign inflows slow down, or halt, there will be a bloodbath,” said Venugopal. “As money has a tendency to seek the best opportunity among competing economies, India cannot reasonably expect a repeat of the inflow in the June quarter.”

Improving growth prospects in the US and Europe, along with stronger performing Asian markets like the Philippines and Indonesia, pose a big a threat to the capital flows into India, he said.

In the US, the Dow Jones climbed 11.3 per cent in the first quarter, Nasdaq gained 8.2 per cent and the S&P 500 raced 10 per cent to a record closing high.

 The writer is a journalist based in India