Friday, February 24, 2012

Unabated Euro-Zone Crisis

There is negativity surrounding the euro zone nowadays; huge sovereign debt, austerity measures on the roll, further taxes for the public and lowering of credit ratings of countries like Britain, Austria, France, Italy, Malta, Portugal, Slovakia and Slovenia by Moody, Standard & Poor and Fitch clearly highlights the damaging financial scenario for the block of nations. Presently only few countries like Germany, Norway, Sweden and Denmark are holding strong and keeping away from the negative ratings, rest all the other countries left are under a close watch by these agencies.

The crisis has taken toll on countries like Greece and Portugal in such an extent that now it is difficult to find solutions for their debt-empowered economy. There are strings of bailout packages which are being utilized in such a way that it would reduce their Debt-To-GDP ratio up to some extent to kick start their economies. But the things are not working; the austerity measures have almost crippled the public spending which resulted in an extremely slow paced growth for the union. These countries have to deal with high fiscal deficits and so dropping the growth momentum too.

Huge debt on these countries have raised obligations towards more interest payment and so the government spends less for the welfare of people, levy more taxes by expanding the tax payable population base and borrow more, which has great impact on the domestic companies. The crisis may even lead to fall in exports to the European countries crippling India’s total exports. 75% of these exports are from manufacturing sector which would impact the domestic industrial production too. As slowdown will affect exports, it can lead to an increase in the already high India’s current account deficit. Further, the stock markets can witness a slowdown in funds from this region as the Foreign Institutional Investors and ECB would require funds to meet their own capital requirements and obligations back home.

So, all these factors clearly highlight the interdependency of one country over another and signifies the crippling effect too. So if the Euro Zone crisis is not solved early it would have a chain reaction which would not only engulf the European countries but also could have serious impact on the developing countries like India.

Though still a positive for India is that it is trying its best of becoming a self sufficient country in all the aspects, barring Oil & Gas, and is not primarily dependent on exports. Secondly, India has diversified its export portfolio in different geographical regions too which would definitely act as a cushion for the country in mitigating the adverse impacts borne out of this crisis.

Sunday, February 12, 2012

The Fear of Reliance on DEBT !!!!

The Reserve Bank of India’s third quarter 2011-12 review of Macroeconomic and Monetary Developments released on January 23, 2012 assessed that risk aversion in the global financial markets has slacked the pace of capital flows to India and if the pace of FDI inflows does not pick up and FII equity inflows follow their decelerating trend then the CAD (Current Account Deficit) may have to be financed through debt flows in the coming quarters.

As per one of the report by RBI, during calendar year 2011 as a whole, foreign debt inflows amounted to $8.65 billion, out of which almost half of it came in December. And in the same calendar year it is said to have recorded a net outflow of equity investment of almost $357 million. On one side there is a recent revival of FII inflows largely in the debt instrument and on the other there has been a collapse of foreign portfolio investment flows, leading to an overall fall in the external investment in equity. But with burgeoning CAD the conclusion arrived that India has to increase its reliance on debt creating flows to finance its deficit.

Measures such as paving way for Qualified Foreign Investors (QFI) to invest directly in India’s equity market is an explanation by the UPA government to establish the fact that it is countering the formed view of “policy paralysis” and boosting again the positivity in the market.  But they are also driven by the need to reverse the slowdown in inflows of foreign portfolio investment. The decline in FII inflows has been attributed to the development abroad, which required FII to book their profits in India and repatriate their funds to meet commitments or cover losses at home.

One danger is that though the government is trying with different measures to infuse positivity in the market by allowing direct access to equity markets but still it becomes difficult or rather impossible for Indian regulators to fully rein in these global players and impose conditions on their financing, trading and accounting practices, controlling unbridled speculation required by them to be regulated at the point of origin. And, if such investors do come in the Indian market then it would be with the intent of reaping capital gains through short term trades.
Thus to make this measure successful it would mark a transition towards allowing a more speculative base of such players in the market but defending that aspect on the ground that it would help to reduce the dependence on debt is indeed questionable.