India takes a cue from Sri Lanka?

Wednesday, 14 August 2013 00:08 -     - {{hitsCtrl.values.hits}}

What Sri Lanka did several months ago in managing its currency, balance of payments and fiscal situation, India seems to be following suit. In its bid to revive a continuously falling rupee, India this week took a host of measures. On Monday the Finance Minister proposed in Parliament to raise funds abroad, allowing public sector financial firms to sell debt to finance long-term infrastructure projects, raising money via deposits targeted at Indian citizens abroad, and liberalising guidelines for external commercial borrowings. This move is similar to what the Sri Lankan Government proposed, letting institutions such as NSB and corporates to borrow from overseas using their strong balance sheets. Taken together, these new measures are expected to bridge India’s forex gap by $ 18 billion. Yesterday India hiked the import duty on gold to a record 10%, the third such increase in eight months, while also raising excise duty on the metal. Sri Lanka last month hiked tax on gold imports. Gold is India’s biggest luxury import and was a key contributor to the all-time high in the current account deficit. The move comes as imports of gold revived to $ 2.9 billion in July after a series of tax hikes and constraints on supplies had initially appeared to stem demand, confirming the resilience of demand in the world’s biggest buyer of bullion. India has also announced plans to impose duties on non-essential items, such as electronic goods, which would need to be carried out without breaking World Trade Organization rules. The rupee got a small lift after the gold measures were announced in late afternoon, after earlier threatening to test record lows. India’s broader aim is to narrow the current account deficit to 3.7% of Gross Domestic Product (GDP) in the fiscal year ending in March 2014, down from a record 4.8% in the previous fiscal year, Chidambaram told Parliament, a goal many analysts said was optimistic. But market participants fear India’s piecemeal approach of raising a couple billion dollars here and a couple of billion there will not be enough to arrest the rupee’s decline at a time when the economy is weakening and prospects of foreign outflows grow on the back of a rollback in US stimulus. Without a more ambitious plan to tackle the current account deficit, analysts say the Reserve Bank of India (RBI) may need to stick to its gambit of draining cash from the financial system longer than expected, risking further strains on the economy and, in turn, making it harder to attract vital foreign inflows. The rupee recovered somewhat after the announcement of the gold and silver import tax hikes to trade at 61.12 to the dollar. It earlier fell to as low as 61.66 per dollar, not far from the record low of 61.80 hit on 6 August. It has lost more than 10% so far this year. India also hopes to attract $11 billion in capital inflows by spurring state-run companies such as Indian Railway Finance Corp Ltd. to sell debt abroad, and by raising money from Indians abroad, among other measures. But the fundraising would be done in an uncertain global economic environment and at a time when growth remains weak. For example, Indian Oil Corp, which is expected to raise $ 1.7 billion, last month sold 10-year dollar-denominated debt by paying about 50 basis points more over equivalent US Treasuries than in its last sale in July 2011. Fears about the US Federal Reserve’s plans to taper back its monetary stimulus have sparked strong foreign selling in many emerging markets, especially in debt. Foreign investors have sold a net $ 11.6 billion of Indian debt and equities since late May, when the rupee started its decline.