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India Announces Big Reforms to Revive Growth & Avoid Ratings Downgrade

India Reforms to Revive Growth

India Announces Big Reforms to Revive Growth & Avoid Ratings Downgrade

India announced more measures in around 24 hours than done in last 8 years, a sign of the urgency felt after high spending and low growth battered India’s finances in recent times. India allows FDI in multi-brand retail, aviation & hikes Diesel prices in a bold new round of reforms aimed at reviving growth & also avoid a Ratings Downgrade. India finally opened its retail and aviation industries to foreign direct investment in a strong bid to shake off a sense of crisis over the slowing economy and a stalled agenda, risking a political backlash. The Indian Government seemed to have made up its mind strongly to push ahead with fresh measures to revive the economy after months of dithering, even as it came under heavy fire from allies and opponents alike for raising heavily subsidized fuel prices. In the biggest policy push of Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers like Wal-Mart and Carrefour to own 51% of supermarket chains, shelved last year after alliance partners threatened to revolt, have been enforced, Commerce Minister Anand Sharma said yesterday. Overseas airlines are allowed to own 49% of Indian carriers, he said. New Delhi is also likely to announce some spending cuts on Saturday for the 2012/13 fiscal year to March, two government sources told Reuters. They did not offer any details on the size of the cuts. The government’s decision late on Thursday to raise diesel prices by 14%, the first such move in 15 months, is aimed at shoring up a weak fiscal position, but it was swiftly rejected by the opposition and allies within the Congress party-led ruling coalition.

India Diesel Price Hike a Bold Step – Should Hold Rollback:

India raised Diesel Price by 5 rupees per litre on Thursday in a move guaranteed to alienate the common man, but please foreign investors, oil marketing companies and ratings agencies. The Diesel Price increase “comes as a rare victory for the Prime Minister and Finance Minister Palaniappan Chidambaram against the ingrained populism” of the ruling alliance. Allies such as Mamta Banerjee, the chief minister of West Bengal state, have said they will continue to oppose moves to allow overseas companies Wal-Mart and others into the country. Banerjee’s party yesterday gave the government 72 hours to reverse the policy changes, Press Trust of India reported. Diesel accounts for more than 40% of India’s refined fuel consumption, and there is no doubt that this move will hurt farmers, commuters, businesses, inflation and the common man in the near term. But sometimes, governments must make hard decisions that threaten the popularity of its ruling politicians. India economy is slowing, the fiscal deficit is ballooning and no country wants its debt downgraded. If raising the price of diesel tells the world that India is serious about fixing its economy, rolling back the price would tell everyone that it’s not. A relatively small amount of pain now will avoid a great deal more pain in the future.

India Risk’s Rating Downgrade:

Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock at home. Infighting in the fragile coalition government led by Mr. Manmohan Singh’s Congress party had earlier forced it to shelve the retail and aviation reforms, casting a shadow over India’s aspirations to join the world’s leading economies. S&P on April 25 lowered the outlook onIndia’s sovereign credit rating to negative from stable, saying the move reflects a one-in-three likelihood of a ratings downgrade to junk status because of slower investment and economic growth. Fitch Ratings cut its outlook on June 18, citing limited progress in paring the budget deficit. Both companies rank India’s debt BBB-, the lowest investment grade. India’s inability in the past months to push through major reforms and ease its subsidy burden has put it in danger of becoming the first of the big “BRICS” emerging economies to see its credit rating downgraded to junk.

Inflation in India can Rise:

The measures are partly aimed at convincing the RBI to lower interest rates to help revitalize the economy. These latest measures will add to inflation in the short term, but will ultimately make it easier for the RBI – Reserve Bank of India to loosen monetary policy and help revive investor confidence. “I believe that these steps will help strengthen our growth process and generate employment in these difficult times,” Prime Minister Manmohan Singh said via Twitter. Hopes of a immediate response from the RBI, which meets on Monday 17 Sep, were not helped by inflation data that showed underlying price pressures remain strong. The increase in diesel prices will add 60 basis points to inflation. Indian demand for refined fuels is expected to rise 4% in 2012 to 3.4 million barrels per day. The government estimates the changes will reduce losses by about 203 billion rupees for the remainder of the fiscal year. But a reduction in excise duty on petrol may mean the net impact on government finances will be lower.

FDI in Multi Brand Retail, Aviation in India comes with Riders:

The government has championed the policy as a way to unclog supply bottlenecks that cause a third of fresh produce to rot before it reaches an Indian table. It is hoped global chains will offer better prices to farmers by cutting out middle men, while also pumping investment into cold storage facilities. But it will also come with stiff riders. Foreign retailers will only be allowed to set up in cities with a population of more than 1 million, and must source at least 30% of goods from local, small industries. State governments will have the freedom to decide whether to allow the supermarkets on their patch and the minimum investment will be $100 million, Commerce Minister Anand Sharma said. Half of that investment must be in rural areas. The Aviation reform will allow foreign carriers to take a stake of up to 49% in local airlines, providing a potential lifeline to the country’s debt-laden airlines.

India Equity Markets Welcome Reforms, Surge Sharply:

The NIfty rose 2.62% to 5,577.65 points, while ending up 4.1% for the week. BSE Sensex rose 2.46% to 18,464.27 points, its highest close since July 26, 2011 and gaining for an eighth consecutive session, also rose 4% for the week. Banking sector surged on hopes that more government reforms could open up the prospect of interest rate cuts, although the Reserve Bank of India is expected to stay on hold at its policy review on Monday after August inflation rose more than expected. ICICI Bank gained 5.1%, while State Bank of India rose 5.6%. Blue chips rallied, with Reliance Industries surging 5.3%, while Larsen & Toubro rose 5.1%. SpiceJet rose 4.4%, bringing its gains over the past four sessions to 17.34%, while Kingfisher Airlines rose 7.5%. Pantaloon Retail gained 7.12%.

INR – Indian Rupee rallies sharply:

The Indian rupee posted on Friday its biggest daily gain in two-and-a-half months after the government’s diesel price hike raised hopes for more fiscal reforms, while the Federal Reserve’s stimulus action sparked a rally in global risk assets. The partially convertible rupee closed at 54.30/31 per dollar, gaining 2.1% from its close of 55.43/44 on Thursday to mark its biggest single-day gain since June 29. The INR rose as high as 54.29 during the session, its strongest since July 4. In the currency futures market, the most-traded near-month dollar/rupee contracts on the NSE – National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.29 with a total traded volume of around $7.6 billion.

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