75 i chronicle

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Cover Story Is the irony of raising FDI limit
Outlook Coal
Stats Restructuring profile of PSU Banks
Emerging Country Hungary
In Focus E-Commerce Industry in India

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75 i chronicle

  1. 1. Investeurs Chronicle July 2013, Volume: 75
  2. 2. Cover Story The government's modest attempt to open up to more foreign direct investment (FDI) might not bring in a flood of dollars immediately, but it is a step in the right direction. The most significant measure is to hike the ceiling for FDI in telecom from 74 per cent to 100 per cent, though investors who want to go up to that level will still need clearance from the government. This could see the exit of several Indian stakeholders in telecom as valuations go up, once policy confusion is over. The limits to FDI in civil aviation and supermarkets remain unchanged and there is no point allowing more overseas investment in insurance and pension funds without legislative action. In defence production, FDI is restricted to 26 per cent but, in theory, overseas investors that bring in state of the art technology can go up to 100 per cent. It has been left to the discretion of the defence ministry to decide exactly what qualifies as state of the art, something that leaves ample scope for graft and a future scandal in defence production units. However, there is an underlying irony here. The government raises foreign direct investment (FDI) limits in various sectors, and in the two days after that, instead of a flood of dollars coming in, projects worth Rs. 80,000 crores have been shelved, with Posco, the South Korean giant, and steel-maker Arcelor-Mittal calling it quits. The economy struggling and the rupee weakening may have forced the central government into action, but the fate of many big infrastructure projects in India is in the hands of other powers: the state of the world economy and state governments, to name a few as also evident from the statement of Yong Won Yoon, Chairman of Posco. Demand for steel from the world's largest consumer, China, has fallen from the heights of 2010, when many of these projects were signed. Commodity prices were booming at the time. Given today's growth scenario, internal reviews on the viability of such major investments is natural. Add to that the state government machinery in many of the mineral-rich states such as Jharkhand, Odisha and Bihar. While they play a critical role in facilitating these projects, the states simply lack the capacity to cut through the red tape. Frustrated by such delays, investors have begun to question whether it is worth it. Though the hurdles are many, one of the biggest and most controversial is land acquisition. And not just for foreign companies. Just ask Ratan Tata about the Singur affair. Vedanta's $9 billion investment aluminium project has been marred by the acquisition battle in the Niyamgiri hills of Odisha. Reaching a balance between the rights of land owners and needs of companies has so far eluded policymakers. Today, prospective overseas investors in India are spooked by the wide holes in policy, its implementation and the scope of graft in the system. For example there is no point allowing FDI in commercial real estate without putting in place a transparent policy to convert agricultural land to commercial/residential use. These powers of conversion belong to state governments, where petty bureaucrats, brokers and politicians demand huge bribes to get the conversion done. The irony of raising FDI limit
  3. 3. Cover Story Countries like the US and Britain, which now have powerful laws that bar their companies from bribery anywhere in the world, will soon find that despite its obvious demographic dividends, India is indeed a complex place to invest in. Wal-Mart is already under the scanner in the US for alleged bribery in Mexico; the probe has widened to include its Indian and Chinese operations. Raising FDI caps along with streamlining the approval process and ironing-out stringent and complicated procedural matters is required. Fixing the investment climate requires a multi-pronged approach which goes beyond tinkering with FDI limits. Some of the improvement areas are: Political instability: With the Central government relying on regional political parties for support in a shaky coalition, economics sometimes takes a back seat. Add to it corrupt and inefficient bureaucracy, and the poor accountability of politicians. Corruption: India is afflicted with a crisis in governance. Complex approval systems have made giving project clearances a fertile ground for corruption. Infrastructure: The weakest link. Power cuts remain daily events, and transporting goods takes weeks. This bottleneck discourages foreign investors from putting their money in India. Government regulations: The government has sent mixed signals to investors by changing it tax and tariff policies without notice. The retrospective tax amendment brought in the 2012 budget, and successive flip-flops, hurt investor sentiment. Labour laws: Inflexibility in retrenchment policies has been a perennial sticking point. Just the announcement of opening up of FDI cannot be termed as a reform. The announcement in no way makes India an attractive investment destination. It is the ease of doing business that attracts entrepreneurs. Indian businessmen are also not investing in India and prefer other countries because of various hurdles and government’s policy of repeatedly changing the rules of the game after capital has been committed. Just setting FDI limits higher is not enough; to get funds flowing, we need better and cleaner governance at all levels. That takes political resolve at the highest level, because corruption in India is systemic, rather than opportunistic, tied to how politics is funded. Highlights • FDI cap in telecom raised to 100% from 74%; up to 49% through automatic route and beyond via FIPB • No change in 49% FDI limit in civil aviation • FDI cap in defence production to stay at 26%, higher investment may be considered in state-of- the-art technology production by CCS • 100% FDI allowed in single brand retail; 49% through automatic, 49-100% through FIPB • FDI limit in insurance sector raised to 49% from present 26%, subject to Parliament approval • FDI up to 49% in petroleum refining allowed under automatic route, from earlier approval route • In power exchanges 49% FDI allowed through automatic route, from earlier FIPB route. • Raised FDI in asset reconstruction companies to 100% from 74%; of this up to 49% will be under automatic route • FDI limit increased in credit information companies to 74% from 49%. • FDI up to 49% in stock exchanges, depositories allowed under automatic route • FDI up to 100% through automatic route allowed in courier services • FDI in tea plantation up to 49% through automatic route; 49-100% through FIPB route • No decision taken on FDI cap in airports, media, brownfield pharma and multi-brand retail.
  4. 4. COAL prices in Asia are showing little sign of recovery after the biggest quarterly decline in a year amid subdued demand and increasing supply from Australia and Indonesia, the world’s largest exporters. Prices of coal at the Australian port of Newcastle, the Asian benchmark grade, may trade on an average $86 a tonne this year. Coal has dropped 7.5% to $81.20 a tonne in the second quarter, the most since the three months ended June last year. Supplies are forecast to rise at least 30-million tonnes as new mines start this year. About 15% of Australia’s coal is extracted at a loss when prices fall below $90 a tonne. The market has been impacted by oversupply, particularly from Indonesia, Australia and the US. For the next couple of months, it looks like things will remain relatively weak. However, the second half of the year is expected to witness modest recovery in demand through emerging markets and USA, which will eventually result in prices moving slightly higher from the existing level. On the domestic front, till now, the depreciating rupee has nullified the benefit of easing global prices. Stats Outlook-Coal Gloss Liquidity trap A situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise.
  5. 5. Emerging Country- Hungary Hungary is a landlocked country in Central Europe.It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. With regard to manufacturing industry performance, Hungary’s ranking (16th) is prestigious considering the entire list. Hungary’s economic freedom score is 67.3, making its economy the 48th freest in the 2013 Index. During the Soviet era, the bulk of Hungarian economic activity comprised of agriculture and various types of factory work including coal mining and small scale manufacturing. Today agriculture in Hungary accounts for less than 5% of economic production in Hungary, while the bulk of GDP comes from the services sector. Manufacturing accounts for about 30% of the economy in Hungary and in recent years several foreign consumer goods manufacturers have set up operation in Hungary. On a quarter-on-quarter basis, GDP increased a seasonally adjusted 0.7%, which marks an improvement over the 0.4% drop recorded in Q4. The Gross Domestic Product (GDP) in Hungary was worth 126 billion US dollars in 2012. The GDP value of Hungary represents 0.20 percent of the world economy. The improvement in Q1 was mainly due to a stronger external sector, whereas domestic demand remained depressed. Private consumption dropped 1.2% in the first quarter (Q4: -1.1% yoy), while government spending fell 2.6% (Q4: +0.9% yoy). In addition, fixed investment contracted 5.6%, which is broadly unchanged from the 5.7% drop seen in Q4. Industrial Production in Hungary decreased 2.10 percent in May of 2013 over the same month in the previous year. The inflation rate in Hungary was recorded at 1.90 percent in June of 2013. In May 2013, according to first estimates, exports amounted to EUR 6.9 billion (HUF 2,023 billion), while imports to EUR 6.3 billion (HUF 1,832 billion). The trade balance was EUR 653 million (HUF 191 billion) in the fifth month of the year, which is a deterioration of EUR 76 million (HUF 23 billion) compared to the same month of the previous year. Foreign direct investments totaled EUR 10.462bn in Hungary, which exceeds the previous year’s figure by EUR 6.7bn and which is the largest amount ever recorded. The amount of outbound FDI by Hungarian enterprises in 2012 was EUR 8.210bn, EUR 5bn above the level registered one year earlier .It is expected that FDI to Hungary will be some EUR 3bn in 2013, excluding large, one-off transactions. In the medium term, inbound FDI is expected to be around EUR 3.5bn per Bilateral economic and commercial engagements are gradually increasing with Indian investments in Hungary reaching a record level of $ 1.5 billion. Bilateral trade reached $840 million in 2011 but dipped to $641.9 billion in Vital Economic Statistics of Hungary Economy Particulars Details GDP (nominal) $126.873 billion (2012 estimates) GDP growth rate 0.70% (2013 estimates) Currency Forint (HUF) Credit Rating BB (S&P) BB+ (Fitch) Fiscal Deficit 1.90% of GDP (2012) Current account Surplus 2.30% (2012)
  6. 6. In FocusForex E-Commerce Industry in India E-Tailing (business of selling retail goods online on the Internet )major Flipkart , recently made the Fund Raising Announcement of USD 200 Mln from its existing investors such as Naspers, Accel & Tiger Global quashing some Doubts about the Future of E-Commerce Industry in India. It’s positive more so for Flipkart, which has been through bad times & is yet to get out of the woods. Hence it’s surprising for a Company to have long been in the market for funds, to make the cut, with its estimated valuation rising $1.2 to $1.5 billion from around $900 million last year. Moreover, we have recently witnessed a slowdown in the e-commerce space. And, after the recent entry of Amazon.in, doomsayers have been writing off Indian e-commerce players. As for the Amazon connect, analysts argue the entry of the American biggie has made it all the more necessary for Flipkart to scale up, and, therefore, it is raising more funds. Both Amazon and Flipkart are similar in their outlook in ignoring profits in favour of growth. Also, the recent shut-down of international retail chains across Europe and the US has sparked global investors' interest in parking their funds once again in e- commerce companies. No Doubt those Investors do not want to miss out on the opportunity to ride a sunrise industry. This logic compels investors to make calculated bets on this sector & the biggest player, Flipkart. E-commerce, in general, & more specifically in India due to the lack of infrastructure, is a capital-intensive business, where companies burn more cash than they are generating &will continue to do so in the foreseeable future. According to a study by Technopak, a retail consulting firm, e- commerce in India, which is pegged at $1billion currently, is set to touch $76 billion by 2021. Overall e-commerce market is expected to reach US$ 24 bln by the year 2015 with both online travel and e-tailing contributing equally. E-commerce analysts said the fund infusion is good news for the industry & shows consolidation and maturity in the market. However, Flipkart's fund raising should not be seen as one-size-fits-all, as it may not signal a turnaround for the entire online retail industry. It may, however, step up investor confidence in the medium term. Sensex Nifty 19,324 .77 20,149 .85 5811. 55 6029. 20 Gold (10 gm) Silver (1 Kg) 26125 26685 40468 40308 Crude Oil ($/barrel) Dollar/INR 107.43 108.07 61.05 59.80
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance TeamChronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Shagun Khivsara shagun@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: InvesteursChronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com

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