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ECONMOMIC ENVIRONMENT OF BUSINESS. Economic environment-major constituents. Global environment Domestic environment Global environment: This involves scanning global scenario in terms of performance of U.S, European Union, China and Japanese economy.
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Economic environment-major constituents • Global environment • Domestic environment Global environment: This involves scanning global scenario in terms of performance of U.S, European Union, China and Japanese economy. Major variables such as GDP growth, inflation rate, employment scenario are the determinants. Domestic environment Overall growth, growth in index of industrial production, fiscal and monetary policies, inflation (CPI and WPI) are the major determinants. Political developments and policies after the new dispensation also important.
Global scenario-other factors • Geo political factors such as tension in Ukraine, Iraq etc. • This has the potential to adversely affect commodity prices like oil. • Regulations in overseas jurisdictions also matter.-Australian Govt decision capping coal exports overseas-adversely affecting major importers like India. • Factors like tapering of quantitative easing in the U.S, theior immigration policies etc.
Exchange rate effect: USD/INR, FII flows and trade deficit ($ billion)
India Inc overseas borrowings Approximately $ 14 billion worth ECBs accumulated during the first 2 months of the FY. This will raise our external vulnerability as measured by external debt. If not unhedged, ECBs pose a significant risk. Hedging costs are also high.
FX reserves and USD/INR As FX reserves increased, INR appreciated and has attained stability. However, RBI continues to mop up Dollars.
Measures announced by RBI to reverse Rupee slide RBI announced various measures. They include: • Deregulation of interest rates on NRE deposits. • Banks allowed to offer interest rates upto LIBOR/SWAP + 400 bps on FCNR(B) deposits till Jan 31, 2014. Also exempted from CRR/SLR. • FCNR(B) deposits of >3 yr maturity allowed to be swapped with RBI at fixed swap rate of 3.5% p.a with a lock in of one year. Swap with RBI only in USD. • Banks allowed to swap Tier 1 capital raised abroad with RBI at 1% below market rate for those with 12% CRAR. • Special USD swap window for oil marketing companies.
Other measures • Attempting to limit rupee trade in the NDF market. NDF (Non Deliverable Forward) is the market for Rupee trade offshore- active is in Singapore and Dubai. Arbitrage between domestic and offshore INR market leads to volatility. • Attempt to get Indian bonds listed in JP Morgan Bond indices. If India gets 10% weight in the index, we would be able to attract $ 25 billion and add to reserves. Addition to FX reserves is necessary to improve import cover (7 months) and to prevent further slide in Rupee.
How Various policies by Govt and regulators impact business environment • Retrospective taxation rules and GAAR provisions adversely affected business sentiment • Rigid rules set by MoEF during previous dispensation contributed • Restrictions on mining adversely impacted steel majors, NPAs in banking sector increased. • Mining restrictions also led to higher coal imports. • Standoff between Govt and RIL-BP combine ovr gas pricing leading to costly LNG imports. • Infrastructure sector in general suffered from policy paralysis. • In the parameter ‘ease of doing business’, India slipped in rankings. • RBI measure to curb INR fall by restricting access to LAF window did not help. It adversely affected bank margins.
RBI surveys-what they reveal For the ensuing periods, expectations are on a high level.
Key takeaways from the survey • Expectation Index (BEI), shows improvement for Q2:2014-15 (114.7) as compared to previous quarter (111.1) and the corresponding quarter of previous year (112.7). • The improvement in BEI for the expectation quarter is due to optimism on overall business situation, production, order books, capacity utilization, imports, etc. • Reduced pessimism on cost of finance, cost of raw material and the profit margin is another reason. • For Q2:2014-15, the proportion of respondents who expected increase in production and at the same time decline in employment (indicating jobless growth) turns out to be around two per cent. This has been consistent throughout past ten rounds of the survey.
Consumer confidence survey Current & Future expectation Index Current Situation Index (CSI) in June 2014 remained at the threshold level as observed in March 2014. However, there has been significant improvement in Future Expectations Index (FEI) due to increase in the positive perceptions on all selected parameters except prices. Overall the consumer confidence index reflects improvement in the positive perceptions during current round of survey.
Expectation on future economic conditions The net responses on economic outlook witnessed consistent increase over the last three rounds. However, net response on current economic condition remained negative and the gradual improvement observed till the last round got reversed . However, the 1 year ahead expectation is upbeat.
Certain measures by Govt & regulators • Norms eased for infrastructure financing-takeout financing • SEBI to formulate rules for REITs and Infrastructure investment trusts • Steps on to make it difficult for willful defaulters to access finance from other sources • Green norms to be eased for enabling investments • Infrastructure sector accorded special focus. • Renewed push for GST by compensating states to the extent of Rs.25,000 Cr. • Merger of PSBs and changes in board constitution.
