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Showing posts with label Livemint. Show all posts
Showing posts with label Livemint. Show all posts

India needs an open capital account by 2025

Harsh Gupta Madhusudan



India's 10-year government bond currently trades around 6%, China 3%, and the US less than 1%. The average of the last two annual (2019 and 2018) GDP deflator: India would be around 3.5%, China around 2.5%, the US around 2%. If India’s average weighted sovereign debt yielded 5% instead of 6% say (still more than the Chinese in both nominal and real terms), then over time the government could spend almost 1% of GDP more on railroads, education and healthcare for the same fiscal deficit. In five years, that would be an annual difference of around $50 billion! My guess is that Indian yields will fall even more.


But it is fair to say that right now both nominal and inflation-adjusted yields follow a clear descending order: India, China and US. That also aligns with their broad sovereign ratings, and the general expectation that governments of richer/developed economies can borrow at lower rates. Indeed per capita income is one of the key factors in bond ratings along with inflation, growth, and debt to GDP ratio.


Focusing on per capita income may make sense because for the same GDP, a smaller population could mean more tax intake since a rich country is likely to have a more developed and formalised economy. But then again, a lower per capita income scenario could also mean higher growth. So, it is not very clear cut.



What is perhaps more interesting to explore is that could a larger absolute GDP, irrespective of per capita income, mean lower borrowing costs? Or more technically, could more sovereign debt - especially in local currency - actually reduce borrowing costs? Of course, GDP still matters as the total debt cannot be completely unlinked from the economy’s size. Also, one has to ignore very small states or chronic defaulting ones.


Now this cannot be easily answered by econometrics because there are not too many large states or economies around. In other words, ‘n’ is small. China and India are the only billion plus populations in the world, and no one else comes close. Other ~$3 trillion or more economies such as the US, Japan, Germany, UK or France already have ‘developed economy’ status and hence near zero or negative borrowing costs.



In fact, recent divergence between Indian and Indonesian yields is partially because of this ‘size’ factor (along with the Indonesian over-reliance on foreign denominated debt). Even the gloom and doom about Chinese debt seems a tad overdone as they have created an entirely new debt category between emerging and developed markets in the mind of some money managers!


Before we continue, I want to comment on what being large means in another economic area: trade. Since the West largely followed free trade over the last few decades for geopolitical reasons as much as economic, the relatively mercantilist approach of China came as a shock to many even though all the now-rich countries had also used this strategy earlier. Which is that when you are relatively large, you can use your monopsony power to implement moderate protectionism and industrial policy to get others to invest to access your markets with the surplus being exported -- in effect reshaping global supply chains.



India is now trying the same. Trade policy that may have seemed silly at $1 trillion GDP (2007) seems worth considering at $3 trillion (2021), especially given excess capacity domestically and globally, and may be even more attractive at $5 trillion (say 2025) though one has to be very careful about the crony capture of industrial trade policy mechanisms. Moreover, at some stage it is rational to switch to evangelising free trade yourself. Let us not get ahead of ourselves though.


But this same $1T-$3T-$5T framework also helps us understand why India now needs to gradually give up its old fears about volatile global flows when the capital account is more open and convertible. In any case, without deliberately thinking about it as such, it is the size of the economy and its current state of development that is making India become less open on trade and more open on capital. The latter needs to be strategically accelerated while the former should be dealt with more tactically.



Now pre-corona or around end of FY20, India’s combined sovereign debt was 70-75% of GDP. Say post-corona, that goes to 85-90% and in an effort to reflate our economy since underlying inflationary pressures are low (going by producer price indices), we take this to 90-95% by FY23. To many, this is sacrilege! The NK Singh panel had recommended this number to be 60% (40% for Union, 20% for states, 2.5% fiscal deficit). One can almost hear Viral Acharya complain while he talks about undemocratic fiscal councils! Of course, those were different times: BC or Before Corona.


Not only is Modern Monetary Theory and Average Inflation Targeting being talked about in New York and D.C. (along with Tokyo and, gasp, even Frankfurt), the up phase of the 15-18 year down and up dollar cycle seems to have peaked in 2020 making this decade much easier to approach an open capital account than the last one, though in some ways also trickier.



In any case with say $3.5 trillion combined debt by end of FY23 or $4.5 trillion by FY25 and with no or much fewer capital controls (thanks to continued building up of foreign exchange reserves, which should not be slowed significantly), who would be in a position to hurt our debt markets? The rupee remains floating and India has never defaulted ---who would even dare to break the Reserve Bank of India? Even the Chinese could not if they wanted to during any future tensions -- we will just print or sell more as needed.


With Indian debt finally being pushed into global indices and India more clearly aligning with the West and Japan geopolitically, now is the right time to bravely reimagine what capital account convertibility could do for India. Not only would the gap between our revenue and fiscal deficits fall, Indian industry and consumers would finally have more rational borrowing costs. With due respect to the great Jagdish Bhagwati who has always been more supportive of free trade over free capital, for India -- at least right now -- the opposite is required.



(The author is an investor and co-author of two books: Derivatives (Cambridge), A New Idea of India (Westland). The views are author's own and do not reflect Mint's)

Courtesy - Livemint.

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A crash to watch : LiveMint Editorial

According to data issued by the Amfi, net flows into equity funds crashed 95% in June to under ₹240.6 crore, while debt funds had a similar tumble, falling to ₹2,862 crore


Indian stock markets have rebounded from their lows, but mutual funds saw a massive drop in inflows last month. According to data issued on Wednesday by the Association of Mutual Funds in India, net flows into equity funds crashed 95% in June to under ₹240.6 crore, while debt funds had a similar tumble, falling to ₹2,862 crore. A relief, though, was that the money went into systematic investment plans (SIPs), which fell only a marginal 2.4% to ₹7,927.1 crore last month. SIPs make up a large chunk of India’s retail outlay on shares.

Overall, market participants seem to be in a purchase mode. The BSE Sensex rose 7.7% in June. Share prices have been on an incline, a rally that largely seems to be led by foreign portfolio inflows. With cheap money available in the West, it was inevitable that some of it would go into Indian equities. Usually, retail investors join such rallies, even if they look fragile. But this time, many of them seem either short of money or were unwilling to put more of their savings into relatively risky assets. Some have been liquidating their mutual funds to make up for income shortfalls. Others may simply have chosen to book profits.


Courtesy - Livemint
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LiveMint Opinion | Importance of insurance sector makes case for independent supervisor

Insurance is a federal subject as it is listed in the Indian Constitution under the 'Union List'. This means that insurance can be legislated only by the central government.

In 1993, with the beginning of liberalisation of the Indian economy, the then government set up a committee under the chairmanship of RN Malhotra, former governor of RBI, to propose recommendations for reforms in the insurance sector. The committee recommended that the private sector be permitted to enter the insurance industry and that foreign companies be permitted to participate, preferably through joint venture with Indian partners. Following the recommendations of the committee in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry.

The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.


Indian insurance sector

The total number of insurance companies in India are just 58, of which 24 are life insurers and the rest non-life insurers. The other stakeholders in the Indian insurance market include agents (individual and corporate), brokers, surveyors and third-party administrators servicing health insurance claims. FDI up to 49% is allowed in insurance companies while 100% FDI is allowed in insurance intermediaries.

The measure of insurance penetration and density reflects the level of development of the sector. While insurance penetration is measured as the percentage of the insurance premium to GDP, insurance density is calculated as the ratio of premium (in US $) to the total population (per capita premium).

Insurance penetration in India is only 3.7%, compared to a global average of 6%. The life insurance penetration level is only around 2.75% in India, whereas the non-life insurance penetration is less than 1%. Compared to advanced economies, India lags in terms of density. The global average of density is $682 compared to $74 in India; the highest density in the world is in Hong Kong with $8,863.


Indian demographic aspects of the rising middle class, increasing awareness of the need for protection and a young insurable population will drive insurance sector growth over the next many years.

With the formal opening of this sector only 20 years ago, most of the learnings and business assumptions are from the public sector enterprise. While they have served consumers for long before the sector opened up, it would be fair to mention that they served the consumers when it was “licence raj" and pricing & product choice was determined by the government. The concept of inclusion started only when the sector started having competition and more product choices developed. Also this sector historically built the sector as combination of ‘Protection’ product and ‘investment’ product. This issue of treating and even selling insurance products as “investment product" is not a correct one and the industry needs to understand that the concept of insurance is “to protect". Some of these have led to challenges of mistrust between consumers and the industry.


Functions and duties of IRDA:

The critical regulatory & supervisory functions of IRDA, amongst many objectives it is tasked under the IRDA Act of 1999, are:

-protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance

-calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business

-regulating investment of funds by insurance companies

-regulating maintenance of solvency margins

Philosophy of supervision

The regulatory role is to develop any legislation to address the objectives of rule-making for the sector, including promoting innovation in the industry to address consumer needs. Whereas, the supervisory role is to ensure compliance with rules & regulations and to taking punitive action against any breaches.


A well-run supervision should contribute to the wider financial stability. As more issues keep cropping up about the irregularities in the sector or consumer-trust issues, the need for stronger vigilance and supervision is needed.

Due to the complexity of insurance entities and the nature of long-term monies that they handle, it is important to maintain a tight watch over anything that could bring in a systemic impact to the insurance market. Risk-based supervision might help in this need for early warning system of flagging off potential issues. For an efficient and unbiased Insurance supervision, the supervisory body should be empowered with adequate powers; including the ability to revoke licences and / or merge a weak entity with a stronger one, the ability to change key management of an entity.


An insurance supervisory body should have executive independence and should be seen by the stakeholders as a truly independent and fair entity. Without this, the confidence in the sector consumers seeking redressal and the industry entities wanting to share their learnings would drastically reduce. Also for a good supervisory body, the ability to take punitive action is critical. In short, the stakeholders should see the supervisory body as having authority and the willingness to take bold decisions; which in turn, builds their credibility and reputation.

Supervisory independence:

As a best practice, in case of unified regulatory & supervisory bodies, the teams that handle supervision (which is almost an audit function) are not involved in rule-making function. A strong sense of collaboration between the supervisory and regulatory functions is prime.


Supervisory independence is the core idea for any independent financial supervisor. And to achieve its role, it needs to safeguard the integrity of the supervisory function. An insurance supervisor should be independent in deciding enforcement actions based on rules-based interventions, and for this, statutory protection of supervisors should be established. Supervisory independence should have adequate legal protection for the supervisory cadre and also from political and industry persecution, to ensure that they can take action without fear of legal action being taken.

Case for new-age talent & new-look supervision

From regulatory body’s institutional vintage perspective, IRDA is quite young and has done tremendous work in the short time. It’s also short-staffed to handle the size of potential consumer grievances, given the wide geographic reach, volume of insurance holders and the complexity of this specialised sector.


It is but natural, in early stages of its presence, for a regulatory & supervisory body, to have a large amount of expertise available from those experts, who built this sector as part of the state owned entities. As the industry expands , it would need more openness, in learning from across the industry players and to building additional capability in supervision. The supervisory body needs to invest in latest digital technologies and to keep pace with the industry players. It needs to have global connectedness with insurance regulators around the world as India allows more foreign players to invest into the insurance sector.

This is a good time to bring the concept of separate supervision vertical or to outsource supervision to outside entity owned by the government, when the insurance sector is set to increase its business volumes and the assets under management of its premiums collected. It would be easier to make the switch now when the industry is at the cusp of growth. With bulk of the insurance companies based out of the commercial capital of the country, it might also be efficient to have the supervisory teams located out of Mumbai. A good supervision is not just routine inspection but also advance indications, which being based in commercial capital could help with market inputs and chatter.


The Human Resource initiatives and capacity building generally takes a long time to be efficient, if it is organic way of nurturing those skill sets. IRDA should invest in enhancing its bench strength. Being a regulator and supervisor of a critical sector that is essential part of the Indian financial stability, it is critical to have sufficient number of experts from various functions in its talent pool. It cannot afford to have lesser than requisite talent. Institutionally it might be the right time to allow for lateral hires to bring in requisite skill-set that are unique and contemporary. It has been observed that cross-pollination of talent between regulatory bodies & industry entities, has added value across the sector, as long as nepotism is not allowed.


A recent example of separate regulation and supervision done by separate entities is that of RBI regulating housing finance sector while the National Housing Bank (NHB) supervising the industry. IRDA might want to explore such an idea as an alternate to the option of having policy development vertical separate from supervisory inspection vertical.

To having an independent approach to supervision and regulation, to addressing growing complexities, size and inter-connectedness of larger financial system, and dealing more effectively with potential systemic risks that could arise due to possible supervisory arbitrage and information asymmetry, it might be prudent to have a separate insurance supervisory organisation.

(The author is an independent markets commentator. The views expressed in this article are his own)

Courtesy - LiveMint.
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India’s snappy I-Day vaccine : LiveMint Editorial

The novel coronavirus has left the world reeling. It acquired pandemic proportions in February, and has convulsed the global economy since. Even as fears of contagion continue to stalk societies in badly hit countries, such as India, scientists and labs have scrambled for a vaccine. Hopes were pinned on Oxford’s clinical trials, an exercise expected to offer corona relief only by year-end or so—the earliest it could get a go-ahead if all went well. On Friday, news broke that the Indian Council of Medical Research (ICMR) was aiming to launch a vaccine jointly with Bharat Biotech by 15 August, much earlier than anyone had anticipated.

In what seemed like a leaked internal ICMR memo, the state-run agency’s head Balram Bhargava said that a vaccine for public health use was envisaged by August 15, “after completion of all clinical trials". This timeline looks either unrealistic or excessively rushed. Every vaccine must be tested thoroughly and widely for safety and dosage efficacy, step by step over months, and this process cannot be fast-tracked without risking a medical mishap. Little wonder, then, that experts have raised eyebrows over this state-backed joint venture. The national significance of the target date does not help win much confidence in the project either.

It may actuallybe doable, for all we know. Maybe British standards are too cautious. But, still, ICMR should consider opening up all its trial records to scrutiny. Let there be peer review. A vaccine is too important a matter for suspicions to arise of corners being cut in a quest for glory.

Courtesy - LiveMint.
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Opinion | Trade worries

India’s December trade figures deepen concerns about the health of our economy. Official figures show that merchandise exports dipped 1.8% from a year earlier to $27.36 billion, marking the fifth straight month of decline. A consolation is that imports fell by a larger 8.8%, helping narrow the trade deficit. But the relief could be temporary. If crude oil prices surge on tensions in West Asia, our import bill could soar.

What needs to be addressed is the sustained fall in exports. At the current rate, India would be lucky this year to match 2018-19’s export figure of $331 billion, let alone exceed it. Global demand remains weak, but action points do exist. Exporters have suffered delayed tax refunds, which need to be cleared quickly. Having walked out of the Regional Comprehensive Economic Partnership, India should up its efforts to strike bilateral trade deals. Also, the rupee’s external value may be too high. It seems more a function of foreign inflows into our capital markets than of trade dynamics. While incoming dollars are welcome, the resultant upward pressure on the rupee has blunted the competitiveness of Indian exports, and that’s not good.
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