There is no doubt that that Finance Minister P Chidambaram is good at working a crowd. US investors think he is silver-tongued and bubbling with pro-business ideas compared to his predecessor Pranab Mukherjee. Still, investors with deep pockets who turned out to hear Chidambaram in Boston, New York and Washington are wrestling with one moot question: Is it worth investing in India as it heads to the polls in 2014?
Chidambaram on his part has decided to take the bull by the horns and vowed to revive growth amid India’s worst slowdown in a decade.
“India will succeed. I know this past year has caused a lot of concern, but this year is over and by elections we will achieve our ambitious economic agenda,” Chidambaram told investors at a private meeting hosted by the US-India Business Council, in Washington.
US investors who attended the meeting preside over combined assets of over $2 trillion. Lloyd Blankfein, CEO of Goldman Sachs, Indra Nooyi, CEO of PepsiCo Inc; Chip Kaye, co-president of Warburg Pincus, John Hele, CFO of MetLife, and Doug DeVos, president of Amway were some investors who jetted into Washington to hear out Chidambaram.
Growth Matters
Increasing growth rates over the past couple of decades have lifted some 200 million Indians out of poverty. But warning lights flashed on India’s economic dashboard after a decade-low growth of five per cent in 2012-13.
The Congress party-led government is aware that it has no crack at winning the elections without high-octane growth. Unfortunately, Chidambaram’s “do-no-harm” budget fell short of high expectations and didn’t give foreign investors the old razzle-dazzle.
“Going forward, China and India will continue to be drivers of world growth, with China growing at 8-8.5 percent and India at 6.1-6.7 percent between 2013 and 2014,” said Chidambaram. “Beyond that, it is only an aspiration. In fiscal 2014/2015, we want to go above 7 percent. Fiscal 2015/2016, we want to go back to our potential growth rate, which is above 8 percent.”
Investors say the absence of significant reforms to sustain growth have now turned India’s slowdown from a cyclical one to something that is structural.
“They are assuming a V-shaped economic recovery but India is vulnerable to global shocks. I think long term investors into India aren’t increasing their exposure until the 2014 election as they want more clarity and continuity in India’s economic policies,” said hedge fund manager Gregory Turza.
Reform agenda
What India most needs to get back on a higher growth trajectory in the medium term is deep reforms. Some powerful political figures who didn’t believe in liberalization, notably Sonia Gandhi, have now been persuaded. To restore confidence in public management, for example, she has agreed to cuts in the huge state diesel subsidies that were supposed to help the poor.
“Diesel rates have been hiked three times already, in steps of 50 paise a litre. Elections should not derail the pricing reforms,” Citi quoted Chidambaram as saying after a meeting in Boston with investors.
But winning the elections is top priority for the UPA government and this doesn’t always translate to good economics. Last week, Chidambaram announced that LPG (cooking gas) subsidies will be shifted to the direct cash transfers scheme, where the subsidy will be pushed into the beneficiary’s bank account directly as cash.
According to a Business Standard report, the Prime Minister’s Office is planning to reimburse LPG users for only one single cylinder directly – the remaining eight will be paid for by the oil companies.
R Jagannathan wrote on Firstpost that that this scheme shows political cynicism at its worst; “The government is, in effect, asking the oil companies to pay for its re-election indirectly. It may also be shifting the burden of compensating the oil firms to a later date – when the UPA may or may not be in power. If the UPA goes, a fat bill will land on the next government’s desk. If it stays, it can always find ways to blame global forces for the need to raise LPG prices.”
Before making his way to the annual spring meetings of the International Monetary Fund and World Bank, Chidambaram is seeking foreign investment to fund India’s account deficit, which hit an all-time high of 6.7 percent of GDP in the October-to-December period. The deficit hole was burned by heavy imports of gold and oil and lackluster exports.
“The third quarter (current account deficit) was large. The fourth quarter is likely to be better and for the overall year, probably around 5 percent, maybe a shade under 5 percent,” Chidambaram told reporters.
India’s foreign direct investment inflows were $31 billion in the April 2012 to January 2013 period. One indication of dispirited global investors has been the net outflow from Indian-focused equity funds, which at the end of March had about $68.3 billion in assets under management.
Chidambaram now plans to revive the economy’s mojo by working on a series of steps to attract at least $20 billion in new investment to fund the deficit without depleting India’s $300 billion in foreign exchange reserves.
The proposals include raising the cap on foreign investment in rupee-denominated government debt by up to $5 billion, reducing tax rates on such investments, making it easier for Indian firms to borrow abroad, and easing curbs on foreign investment in sensitive sectors such as defense, telecoms and media, finance ministry officials told Reuters. During his US swing Chidambaram also said a regulator for roads would be set up soon and nearly a dozen infrastructure debt funds are in pipeline.
Harvard-educated Chidambaram, who returned as finance minister for a third time in August, received a surprise honour on his US trip: Time magazine named him among the 100 most influential people in the world in its annual list of global achievers.
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