BOMBAY, 30 September — Last week, the Indian currency debt suffered a blow when the renowned international rating agency Standard and Poor’s (S&P), downgraded the rupee debt investment grade to junk grade, citing a setback in the divestment program, mounting debt and weakening finances of the public sector. S&P cut the country’s long-term local currency sovereign credit rating to BB-plus from BBB-minus, and the short-term rating to B from A3.
Well, in a kind of defiant mood, this downgrade was shrugged off and there was consensus in the equity, debt as well as the forex markets that this act of S&P would have no major impact. More significantly, it was concluded by majority of analysts that this downgrade would not in any way affect the foreign institutional investors’ (FII) allocations to India.
Having said this much, we surely have to ascertain the consequence of the downgrade. Surely, as concluded by the analysts, the downgrade might not have an immediate effect but we must certainly read the writing on the wall — the health of India’s finances is a major cause for concern.
This downgrade by S&P has come about mainly due to the government back tracking on privatization of the Public Sector Undertakings (PSUs). Until now, India’s disinvestment program had gathered momentum but now there is fear that the objective of fiscal correction and continuing with economic growth would get derailed.
And all this has been having a telling effect on the Indian stock markets. The downgrade was accepted nonchalantly with a 16 points fall but overall the sentiments on the bourses, especially in the wake of this downgrade, looks gloomy and for now, the FIIs might shy away from making fresh investments. Even as fund managers are not bearish over a 12-month period, almost 50 percent of the fund managers now expect markets to stay below the 4,000 mark even a year from now.
In the past many months FIIs haven’t been very active in the domestic equity markets. With the spate of bad news continuing unabated, it is unlikely that there is going to be any reversal in this trend.
India is placed at the 119th position in the foreign direct investment performance index of United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2002.
The report said China topped the list in Asia, followed by Indonesia and Thailand. India’s index value was put at 0.2 against China’s 1.2 and Sri Lanka’s 0.4. And although Pakistan scored the same as that of India at 0.2, it was ranked higher at 114th position. These findings were based on UNCTAD’s new FDI benchmarking tools which measure performance by standardizing a country’s inflows to the size of its economy and measure potential by using a set of economic and policy factors of importance to foreign investors.
And it is this deceleration in macro fundamentals in recent years which must have adversely affected India’s FDI potential rating. The FDI inflow to India has in fact, been falling short of projections almost every year during the last decade.
Faltering growth in industrial production since the last two years has prevented any new greenfield projects from taking roots and in this context, it is quite understandable that FDI inflows have been falling. But what is alarming is that foreign holding in established companies has also been on a decline. Statistics shows that out of the 100 big private sector companies in India, 66 of these have been showing falling foreign holding during the last one year, between June 2001 and June 2002.
In actual terms the foreign holding declined in 68 companies. The foreign holding in Sterlite Industries fell by 19 percent bringing down the share of foreign holding in the total equity of the company by 9.4 percentage points from 49.6 percent in 2001 to 40.2 percent in 2002. The share of foreign holding in Reliance Petroleum, during the same period, has fallen by 4.3 percentage points from 7.8 percent to 3.5 percent. Similarly, Grasim Industries, Tata Engineering, Hindalco Industries, Essar Steel, BPL, Videocon International and Century Textiles too have witnessed declines in the share of foreign holding in the total equity of the company.
But all is not dark. The latest figures if foreign direct investment (FDI) inflows is something definitely to cheer about. FDI Inflows jumped by 68.6 percent during the first seven months this year at $2.7 billion against $1.6 billion in the same period last year. On financial year basis, FDI inflows surged 69 percent to $1.5 billion during April-July ‘02 over $0.9 billion a year ago. The FDI inflows are exclusive of American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).
Yet, before one could cheer and make merry, the party popper came in the form of statistics from International Monetary Fund (IMF) and National Council of Applied Economic Research (NCAER). IMF has lowered India’s growth projections to five percent, NCAER forecast that the GDP growth this year would be even less at 4.8 percent against its earlier estimate of 5.5 percent. And NCAER has justified this revision of macroeconomic forecasts for 2002-03 with stagnant agricultural output, output growth of industry at 5.6 percent and services growth of 6.9 percent.
The gross fiscal deficit of the central government is projected to rise to 6.3 percent of the GDP at market prices, up from 5.9 percent projected in June and up from the budget estimates of the government at 4.5 percent, it said. While improved tax collection or better realization from disinvestment could reduce the fiscal deficit, the slippage relative to the budget estimate is likely to be significant.
Well, there is no doubt that India has got to shore up all the energy it can and make attempts to overcome all odds.
