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Sinha is a hate figure for many in India |
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Cracks appeared in India’s ruling coalition soon after the party leading the government, the Bharatiya Janata Party, fared poorly in local elections in February.
Even as India’s finance minister, Yashwant Sinha, announced his annual budget in parliament in the last week of February, religious riots were breaking out in a western state ruled by the BJP and tension
was growing in another large state over the building of a temple on a disputed site.
A chorus of protest greeted Sinha’s announcements of modest cuts in subsidies on diesel fuel, cooking gas, fertilizers and government savings schemes. Not surprisingly, he has rolled back some of those cuts. A government whose political moorings are weak cannot push too hard on economic reform.
In the din over subsidy cuts, other reforms contained in Sinha’s budget, particularly for foreign investors, are likely to slip through parliament. One is set to remove the ceiling on foreign portfolio investment in most sectors (exceptions include insurance, public sector banks, retailing and real estate). Another will ease exchange controls on capital allowing Indian mutual funds to invest abroad. A third will allow foreign banks to incorporate subsidiaries in India and operate just as Indian banks do. At present they are allowed to set up branches, each of which needs the central bank’s approval.
Yet foreign investors in India have mixed feelings because, as they point out, the devil is usually in the fine print. Nikhil Johri, who heads Alliance Capital in India, says: “We do not know the details like how much each mutual fund can invest abroad. The earlier limit of $10 million for investments in Indian equity overseas is too small to build a diversified debt portfolio.” Indian mutual funds would look first for arbitrage opportunities on prices of bonds of top Indian companies traded overseas.
Sanjay Garodia, who manages the debt funds at Prudential ICICI, says: “That is the first logical step because we understand the credit and given the current prices and cost of hedging, there is an opportunity.” Yet, as Johri points out, the government’s announcement seems to suggest that the funds can invest only in international investment-grade paper and Indian credits are mostly of lower grade.
The move to open doors to foreign portfolio investors is likely to have a marginal impact. Earlier such investors could invest up to 24% in most Indian companies, which could go up to 49% once the boards of those companies cleared it. Only in a handful of companies is foreign portfolio investment anywhere near these limits. U R Bhat of JPMorgan Chase says: “It will have some positive impact on sentiment but is unlikely to spur new investments.”
According to an official of the central bank, which keeps tabs on foreign portfolio investment in Indian companies, caps on foreign investment in sectors such as insurance (26%) and telecoms (49%) are likely to stay. So far this fiscal year, apart from a dip in September last year, foreign portfolio investors have invested around $1.6 billion on Indian bourses. Their total investment at cost is just over $15 billion, around 10% of the market capitalization on the Bombay Stock Exchange.
Large foreign commercial banks in India such as Citibank, HSBC and Standard Chartered Grindlays will weigh the costs and advantages of setting up subsidiaries in India. Those with a large retail presence in India could gain from a lower cost of funds from possibly being able to set up branches more freely and being able to borrow in the inter-bank market.
But they would have to bear the cost of the high statutory liquidity and cash reserve ratio on their liabilities.
Like Indian banks, they would have to abide by mandated “social sector” lending to agriculture and small businesses, currently around 40% of all loans. The government recently allowed foreign banks to buy up to 49% of local private banks.
However, press reports say that the regulators might not allow ING subsidiary Bank Brussels Lambert to increase its stake in Vysya, a private bank, from 20% to 49%, because ING has an insurance joint venture with the same bank where foreign investment is restricted to 26%.
As one foreign banker puts it: “It sure looks like an invitation, though I’m not sure if it’s to a party.
