Expert Zone

Straight from the Specialists

Managing India’s budget deficit

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The budget deficit has been a concern for India, but Finance Minister P. Chidambaram has assured that the government will not deviate from the target of 3 percent deficit in 2017. In the very first year, however, it has become almost obvious that the target will be missed.

Budget deficit is not the privilege of government alone as even corporates and households borrow like the government to fund deficits. However, they ensure that the money is used in a manner that it is repaid in time. With the government it is different — it can borrow more in order to repay old loans and it can do so with impunity because banks are a captive market for the government securities. That results in mounting public debt which stood at 56.5 trillion rupees at the end of March 2013. Of this, 40 percent is held by banks.

When companies borrow they invest the money in assets which are productive and yield a return. Companies’ deficits generate growth and productive employment. Budget deficit of the government to the extent it funds productive expenditure is no different, but there are no assets against 60 percent of public debt. The money is spent on current uses and the government borrows without any consideration for repayment.

That creates two major problems. First, the huge borrowing by the government results in overcrowding of the market and consequently in increasing interest rates. The available finances get distributed in favour of the government to finance less productive expenditures and against private sector which could have invested in more productive assets. The budget deficit consequently suppresses growth.

Indian hedge funds get knocked down but get up again

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The fortunes of hedge funds focused on India continue to twist and turn, with many plots and subplots. After witnessing widespread losses and heavy redemptions in 2008, Indian hedge fund managers bounced back remarkably to post a 50 percent return in 2009. They continued their good form in 2010, delivering healthy gains of 12 percent during the year.

But in 2011, the managers witnessed losses amid declining markets and a depreciating rupee. At the end of that year, many managers expressed confidence in the underlying market for the following year and predicted gains for the rupee by mid-2012 — both these predictions came to pass. The Eurekahedge Indian Hedge Fund Index was up 13.13 percent in 2012, making it the strongest regional hedge fund mandate for the year. Some of the funds even witnessed asset inflows in 2012 and early 2013, a rarity for Indian hedge funds since the financial crisis.

India Markets Weekahead: Results of state elections a key driver

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Markets had been on a roller-coaster ride but closed weak for the third week in the row with the Nifty in the 5950-6000 range providing support.

A hint from the U.S. Federal Reserve on tapering its bond-buying programme was enough to spook the markets. Though this is expected in the first quarter of the new year, it remains to be seen whether chairman-elect Janet Yellen’s dovish stance would postpone it further.

Mall developers take to revenue-sharing to woo retailers

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Over the last five to seven years, the retail segment in India has evolved towards a more organized pricing structure. After the real estate boom of 2005-06, when property prices increased to as much as 40 percent of a retailer’s operating costs, developers seemed more willing to share the business risk. They moved from a per-square-foot rental model to versions of the minimum guarantee and/or the revenue share model. Most investment-grade properties in major cities now follow this model, unlike shopping centres in smaller cities.

In the original model, rentals varied depending on the store and location. But with increased brand awareness and rising vacancies, developers saw the need for a customized tenancy mix, adopting efficient mall management techniques while protecting retailer interests to maximize their own earnings.

India-Pakistan border flare-up a zero-sum game

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(Any opinions expressed here are those of the author, and not necessarily of Thomson Reuters)

At places along the Line of Control (LoC), barely a wire separates the Indian soldier and his Pakistani counterpart. The genesis of the recent flare-up was the killing of five Indian soldiers on the Indian side of the LoC. The media blitz in Delhi found more fodder with a spike in infiltration attempts and exchange of fire beyond the LoC at posts across the international border.

Rupee should not harden further

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The rupee has recovered over the past few weeks after falling to a record low of 68.85 per dollar in August. After a period of unease, the finance ministry and the Reserve Bank of India can now take it a little easy. But care needs to be taken that the rupee is not driven up further.

Speculation about the end of the U.S. Federal Reserve’s bond-buying programme in May affected global currencies and the rupee was not alone in this predicament. The announcement had created a scare about the tapering of quantitative easing. That would have dried up liquidity that the market had got used to. The Brazilian real, Indonesian rupiah, and the Indian rupee were the principal losers.

India Markets Weekahead: Investors should wait for a correction to buy

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Markets continued a strong rally to close the week around 3 percent higher. After the partial U.S. shutdown was confirmed and triggered speculation over the postponement of QE tapering, a weakening dollar and the rupee’s subsequent appreciation also helped lift the mood.

Though the current account deficit for the first quarter was a better-than-expected 4.9 percent, IIP data that came in after market hours on Friday showed India’s industrial production had slowed to a dismal 0.6 percent in August. This suggests that buoyancy in the stock markets was driven by liquidity and sentiment, while things are different on the ground.

SEBI tries to get it REIT again

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

Ease of funding is a key recommendation for the growth and development of the Indian realty sector in the coming decade. New instruments of funding should be allowed into the sector, especially real estate investment trusts (REITs) — an investment mechanism that buys income-generating real estate assets and passes on the yield to investors.

In this current climate of dwindling investor sentiment and a plunging rupee, there is a need to implement funding options such as REITs for infusing much needed liquidity into the sector. The total REIT market size in the Asia-Pacific region is approximately $205 billion but India has been unable to take advantage of this funding opportunity, mainly because of the lack of an existing regulatory framework.

NSEL crisis puts spotlight on conflict of interest

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The ongoing National Spot Exchange Ltd (NSEL) payment crisis has highlighted the need for better regulation of commodities exchanges and increased transparency in corporate governance.

The rupee on a crash course

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Given the kind of volatility in financial products and asset classes that we have seen in India and some emerging markets over the last few weeks, it’s likely to be a long winter for the Indian economy.

The rupee is at an all-time low against the dollar, FIIs are big sellers in Indian debt and equity markets, the Sensex is falling and bond yields have risen. Adding to India’s misery, there’s no sign of inflation easing or interest rates coming down in a hurry. The twin deficits – fiscal and current account – are at levels that could expose the economy to a potential rating downgrade.

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