L E A D S T O R Y
Over The Hill?
If a nation's currency be the reflection of its economic health, then India-baiters should be grinning. Ever since the rupee breached the psychological barrier of Rs 45 to touch Rs 45.07 versus the US dollar on July 21, 2000, there has been nervousness in the market-including stockmarkets. First, there was massive selling by foreign institutional investors (FIIs) and then the fear of higher interest rates-thanks to the reserve bank of India's swift move to raise the bank rate by one percentage point-drove the stockmarkets down.
But is the rupee's exchange value an accurate reflection of India's economic fundamentals? Not necessarily. According to the RBI, the widening differential in interest rates between the us and India was leading to a ''shift in asset preference'' from the rupee to the dollar. Hiking the bank rate would marginally narrow the differential, besides making the bank's intention clear to manage the rupee. Says K.N. Dey, 43, senior vice-president, Emecklai: ''hiking the bank rate will not necessarily help.'' Unlike earlier, when rupee volatility was often exacerbated by inter-bank speculation, the current slide has been on the back of corporate demand.
The main reason why the rupee fell had more to do with slowing capital inflows. In the past two months alone, there has been a net outflow of $535 million (Rs 2,381 crore) foreign institutional investment in equity and debt. During the whole of 1999-2000, foreign institutional investment totted up to a bare $3 billion. The Centre for Monitoring Indian Economy (CMIE) projects forex inflows of $9 billion for 2000-01-almost a billion less than last year's. That apart, the positive trade balance of the last four years could slip to a barely balanced position due to the high oil import bill. The bottom-line: the rupee could hit more air pockets this year.
If there is anything wrong with the economy, it is its inability to turn the tap on FDI inflows. These can only improve by reforming the public sector and attracting investment in key sectors like infrastructure. FDI inflows in April and May, 2000, totalled $979 million compared to $2.16 billion in the previous 12 months.
A.V. Rajwade, 64, Mumbai-based forex consultant, puts the issue in perspective. ''The worry is not so much the fall in the rupee as the possibility of a hike in domestic interest rates,'' he says. On its part, the RBI claims there is sufficient liquidity in the system to keep rates from inching up. But the RBI's belt-tightening could result in a mop-up of Rs 9,000 crore-Rs 3,800 crore due to the CRR hike and reduction in refinance availability of about Rs 5,000 crore. Any hike in rates could affect the investment sentiment and indirect tax collections, which form nearly 75 per cent of the total tax revenue collections. Direct tax revenues will also be lower, if interest rates go up given the level of operating profits.
Then there's another reason. The government is yet to complete two-thirds of its borrowing programme of Rs 1,17,000 crore. Already caught in a debt trap, the last thing the government can afford is even more expensive debt.
The RBI's forex stockpile has eroded by $2 billion in the recent past because of frequent market interventions. clearly, artificial props will not work for long. The rupee must find its own feet. And for that to happen, the economic engine must be primed to deliver more greenbacks.
F O R E
X R E S E R V E S
Scene: Panic-striken finance ministry mandarins are burning the phone lines, calling up the International Monetary Fund and anybody else who can lend some dollars. The reasons: a sudden withdrawal of non-resident Indian (NRI) dollar deposits, oil prices are up 40 per cent, and forex reserves close to depletion. If oil imports don't happen next month, the economy will come to a halt.
Alarmist and exaggerated? Yes. Improbable? No. At $36.5 billion in June, 2000, India's forex reserves are higher than ever before. Yet, its composition is a cause for concern. While there's only $4 billion of 'hot money' in the reserves, almost $21 billion is in the form of NRI deposits. A plunge in confidence could trigger a flight of dollars. Without forex, the country would be hard-pressed to pay for its oil and other critical imports. Points out B.B. Bhattacharya, 53, head, Development planning Centre, Institute of Economic Growth: ''The fate of the economy today depends more on the NRI behaviour than economic activity.''
With the US interest rates at a high of 6.25 per cent-almost on par with India's 7 per cent-there's less incentive for the NRIs to park funds in India. In fact, the rise in NRI deposits is not because of any real surge in inflows, but because of interest accruals. Notes a Delhi-based banker: ''There is very little fresh business.'' Growing integration of stockmarkets worldwide will make foreign institutional investments also more volatile.
So, the question is whether the $36.5-billion figure is enough to meet a crisis situation? Perhaps in the short-term, but certainly not in the long-term. ''Don't forget that Mexico exhausted $26 billion between January and November, 1994, and South Korea and Indonesia their entire reserves during the currency crisis,'' warns Hiranya Mukhopadhya, 31, a Fellow at the National Institute of Public Finance and Policy.
Then, there is the issue of balance of payments deficit as well as debt repayment. The total debt-servicing during 1998-99 stood at $10.73 billion, while interest payments on NRI deposits alone was around $1.71 billion. Unless export earnings pick up, India's forex reserves will continue to tread on thin ice.
I N S U R A N C E
Five years after the R.N. Malhotra Committee submitted its recommendations on the privatisation of the insurance sector, the first set of 10 guidelines has been notified by the Insurance Regulatory and Development Authority (IRDA). The guidelines cover key issues like the manner of registration of application to the calculation of 26 per cent foreign equity limit.
There are no surprises in IRDA's notification, as most of the guidelines were penned after consultations with the industry. Besides, the draft regulations had been posted on the Net for public criticism and suggestion. If the industry is surprised at all, it is at the speed with which IRDA-headed by N. Rangachary-finished the last lap. Despite the passage of the Bill in November last year, IRDA had not been established until May this year. Points out Anthony Jacob, 39, CEO, (India Liaison Office), Royal & Sun Alliance Insurance: ''It's a significant achievement considering the time-span and the size of the team.''
One of the thrust areas of the guidelines is rural India. The notification makes it mandatory for private companies to sell at least 5 per cent of their total life insurance policies in rural areas in the first year, and a high of 15 per cent in five years. In general insurance, companies will have to start off with 2 per cent rural exposure and ramp up to 5 per cent by the third year.
Although rural insurance is not enforced in the west, private players are not complaining. ''Logistics could be a problem, but achieving targets should not be,'' says Stuart Purdy, 38, Chief Representative Manager, CGU Life. It makes good business sense too. Points out an analyst with Jardine Fleming: ''Eventually, rural markets are where the business is.''
The guidelines also permit foreign institutional investors (FIIs) to invest in insurance joint ventures. Such FII holdings will be in addition to the 26 per cent foreign equity cap, which will not exceed Rs 26 crore in the case of insurance companies and Rs 52 crore in the case of re-insurance ventures. ''It's a firm foundation for a competitive insurance market,'' Purdy.
Some controversial guidelines, however, have been held in abeyance. For instance, IRDA hasn't spelt out the guidelines for brokers and brokerage firms, including the equity limit for the latter. Also, the issue of regulation of surveyors has not been addressed. Surveyors fulfil the critical role of loss assessment. Similarly, specifics of reinsurance for non-life policies have not been given.
In the case of reinsurance in life policies, only those insurers which have at least a 'BBB' (pronounced Triple B) rating from Standard & Poor's, or its equivalent, will be allowed to place their reinsurance business outside India.
Still, if there are few complaints, it is because in a country with the highest savings rate but the lowest insurance rate, there's room enough for all.
S T A
T E F I N A N C E
Its intentions may be noble, but also ambitious. The Eleventh Finance Commission, which presented its report to the Parliament recently, lays special emphasis on repairing the fractious Centre-State fiscal relations.
Accordingly, some of its recommendations are radical and likely to raise the hackles of both bureaucrats and state governments. The report suggests that there should be a tight rein on salaries and pensions, interest payments, and subsidies of both the central and state governments. To that end, it has suggested the scrapping of Pay Commissions, which are set up every 10 years for pay revisions. The rationale: the twice-a-year dearness allowances more than make up for inflation. But a more controversial suggestion is the linking of wage hikes to a state's ability to pay from its own resources. Says the report: ''States cannot afford to pay scales unrelated to their revenue capacity and then expect the Centre/to extend support or borrowing.''
Curiously enough, the Commission has little to say on reduction of pensions, which is the fastest growing item in state budgets. Its not-so-bright solution: absorption of defence retirees into government departments. Points out a Delhi-based economist: "It's a joke. How is this going to help reduce the wage outgo?"
On the other contentious issue of interest payments, the Commission has welcomed the Finance Ministry's proposal to allow states to prepay loans. And on subsidies, it is categorical that the quantum must be scaled down.
Given that the Commission has Presidential backing, some of its recommendations may sail through. Still, it will be a choppy ride.
C O R P O R
A T E R E S U L T S
Amid the gloom of the stockmarket's fall and the rupee's depreciation, a streak of good news is coming from corporate India. BT's analysis of the first-quarter results of 100 companies shows a sharp increase in profitability and a not-so-modest rise in sales. What's more significant is that the gain in the bottomline is much more than the growth in total income. For instance, sales of the sample companies, went up by 17 per cent, but net profits grew an impressive 30 per cent.
A part of that may be explained by the 18 per cent jump in other income for these companies. But without doubt, a large part of the gain comes from the shoring up of internal efficiencies. A pointer: expenditure rose by less than a fifth. Agrees Dhiraj Aggarwal, 37, CEO, Sharekhan.com: "In some sectors, the external environment has played a key role in ensuring efficiencies.''
The first flush of results, however, tends to distort the actual performance of corporate India. For a simple reason: the first to make announcements are invariably those who have good news for their investors. Besides, the early birds tend to be the new economy companies. Predictably, the top-most gainers in sales in the list are software companies. But there were only two infotech companies (Maars Software and LCC Infotech) among the top bottomline growers.
Among the old economy companies, the main turnover pushers were Jindal Strips (74 per cent gain), Insilco (69 per cent), Hero Honda, and UTI Bank (57 per cent each). Of these companies, only Hero Honda managed to pull its bottom-line in tow, registering an 81 per cent growth.
Although interest costs may be headed up in the second-quarter, it apparently wasn't a problem in the first. Interest charges for the companies in question grew by less than 10 per cent. But tax registered a sharp 23 per cent increase. But at this stage, the tax outgo is only a notional amount, since taxes are paid at the end of the fiscal.
Dalal Street, however, has failed to respond to the quarter's sterling results. Rather, it has been busy worrying about the BJP administration's spat with the Bal Thackeray-led Shiv Sena. With the two sides making a face-saving deal, Delhi-and the stockmarket-should now be breathing easy. Which means that the foreign institutional investors, who have been dumping stocks in the market, should turn buyers.
But there are indications that the next three quarters may be weak in comparison to the first. In the auto industry, at least, there are signs of a slowdown. The colour television industry is also grumbling about low offtakes.
Yet, it is too early to say if this will spread across industries. Corporates are hoping that it's just a blip.
T R A V E L
If you thought every Indian who wings his way out of the country on a foreign jaunt ends up in London or San Francisco, think again. Growing affluence and destination choices are creating sharp segmentations among the outbound travellers. Agrees Ravi Shankar, 42, senior manager (leisure travel), Thomas Cook India: ''The leisure travel market is small, but sharply segmented. There is a clear tourist profile for every segment.''
The travel trade divides the leisure travel market into four categories: the first-time travellers doing the Singapore or the Dubai leg; the second-time travellers who opt for westward-bound packages-usually Europe or the US; the frequent travellers who go for individually-planned tours and opt for longer stays; and the super-premium category that chooses non-typical destinations with luxury accommodation.
Each category has its own brand of people. The first-timers invariably are small-time traders and first-rung executives, who prefer travelling in groups, to either South-East Asia or Dubai. The 'done-it-once-before' usually are prosperous traders, small industrialists, and senior execs, who prefer to chill out for 10-15 days in, say, Europe or the US. Points out Kapil Goswami, 38, Managing Director of Transworld Travels: ''Together, the first- and second-levels make up three-fourths of leisure travel market.''
The other quarter comprises senior executives, top businessmen, and industrialists, who are divided into two categories: apartment tourists and the royals. Their getaways are more exotic. While the former prefer hand-picked destinations and putting up in apartments rather than hotels, the latter go for the big bang. Their choice? A Mediterranean villa or a tour of the Canadian Rockies, or perhaps an Alaskan Safari. Of course, there's nothing to beat a two-week long qe2 cruise.
So, now you know. There is no such thing as the Great Indian Traveller. There are just too many of them to fit one bill.
Paroma Roy Chowdhury
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