India and foreign investment

• India’s  national monument, in New Delhi, is a tall, broad gate. That is ironic, for the country is hard for foreigners to enter, whether they be individuals trying to get a visa or businesses trying to invest.
• India’s inaccessibility is unfortunate because, to bridge the gap between its weak domestic saving and its high investment needs, it must import capital, especially foreign direct investment (FDI), the least flighty kind. Yet the latest figures are going in the wrong direction. Last year India got just $24 billion in FDI, down by almost a third on 2009. Globally, FDI was flat over the period.
• There are many reasons why foreign companies are put off India, from corruption and bureaucracy to the difficulty of obtaining land. These are problems that must be fixed for the sake of local, as well as international, businesses. But in too many areas foreign firms remain barred from entering the country altogether—railways and legal services, for instance—or are restricted to minority stakes—such as insurance and domestic airlines.
• Indian officialdom realises this must change and, at the pace of a Himalayan glacier, has been opening up. From this month, for instance, foreign firms are allowed into a wider range of agricultural businesses. But many other such reforms are stuck. Given the huge benefits that liberalisation could bring to India’s 1.2 billion people, the government should pluck up courage and fling wide the gates.
• India’s primitive and wasteful retail industry is the most glaring example of the need for foreign investment. The business is dominated by tiny mom-and-pop stores. The near-absence of big supermarket chains means there is no “chill chain” of transport and storage to keep fruit and vegetables fresh from field to shopping-basket. As a result, a quarter or more of such produce is wasted, a catastrophe in a country where so many go hungry. In more advanced retailing systems, less than a tenth is lost. Some big Indian firms are moving into the business, but what is needed is to lift the remaining restrictions on foreign ownership and let in international experts such as Walmart, Tesco and Carrefour.
• Retailing employs more than 30m Indians, so some fear social unrest if the admission of foreign chains puts small shops out of business. But given India’s rapid growth there is plenty of space for supermarkets to expand without killing small stores. Indeed, the tiddlers would be better off buying their supplies from foreign supermarkets than from the inefficient, costly middlemen they rely on now. In any case, such worries are greatly outweighed by the potential benefits to Indian consumers: lower prices and better quality, choice and nutrition. Economists in America talk about the beneficial “Walmart effect” that the ubiquitous cheap chain has had on curbing prices. Indians, as they fret over soaring food costs, might find such a thing a godsend.
• Given the success some Indian companies are now having on the world stage, India’s fear of foreign competition at home seems odd. It is time for the country’s politicians to sweep away such protectionism for good, and declare that India is as ready to take on the world in business as its World Cup-winning team is in cricket.

To make the financial system quite a bit safer

• The sinking of the Titanic led, in time, to a new wave of regulations covering safety at sea. The new rules, which included an edict that ships carry enough lifeboats to accommodate all those on board, struck such a sensible balance between safety and cost that they were soon widely adopted. Britain’s Independent Commission on Banking, chaired by Sir John Vickers, a former chief economist at the Bank of England, hopes to do the same with proposed rules that should make the financial system quite a bit safer, yet without imposing such onerous costs that its recommendations are laughed at all the way to the rubbish bin.
• The two main recommendations in the commission’s interim report, which was released, are that big British banks should hold a lot more equity capital against their assets and should rearrange themselves so that their retail banks can survive (or be plucked to safety) even if the rest of the bank hits a financial iceberg. The commission also wants to beef up the competition on the high street, signalling that Lloyds Banking Group in particular needs to divest more branches than is currently required under European Union rules.
• On capital, the commission reckons that the minimum that systemically important banks should set aside as buffers ought to rise to 10% from the 7% proposed by Basel III. Its reasoning seems to be based on a mixture of research and realism. The interim report argues that there is ample evidence showing that the new Basel standard (which itself is twice as high as before the financial crisis) is far too low, and that even 10% may not be quite enough. The commission seems to have settled on this number in the hope that it will not be so high as to be unceremoniously rejected, and proposes that the additional 3% becomes the new surcharge applied to big and systemically important institutions. There is perhaps hope that in Britain this could become the new standard for large banks. It seems unlikely, however, that the Basel Committee on Banking Supervision, a huddle of central bankers and regulators, would agree to an equity surcharge this big as the new global standard. People close to the talks seem to think the number agreed to in Basel will be closer to 1% than 3% and largely, if not entirely, composed of convertible capital instruments.
• The Vickers commission’s second big proposal is to have banks ringfence their retail arms. Large universal banks, which combine retail and investment banking, would be allowed to keep playing in the capital markets. They would, however, have to set aside enough capital in separate pools to be sure that either part of the bank could survive without the other.
• The proposals are far less radical than some banks may have feared. They will probably also not cost that much to implement. Industry estimates put the cost of ringfencing at about £5 billion ($8 billion) a year, mainly because funding costs of the separate parts will rise as each will be less diversified than the whole. These estimates are probably overstated. Moreover, the real impact of the commission’s proposals is that they may help to bring about a measure of transparency and market discipline to bank funding.
• Because of its reasonableness, the Vickers commission’s recommendations will be difficult to dismiss. A final report is due in September.

the reformation

• An  disjoint attempt made by IMF to refine it’s thinking on capital control. Foreign capital fled the emerging world in the throes of the economic crisis. Now, lured by their better growth prospects and repelled by rich countries’ low interest rates, money has gushed back into countries like Brazil, Peru, South Africa and Turkey. Paulo Nogueira Batista, Brazil’s executive director at the fund, calls it an “international monetary tsunami”.
• Usually emerging markets welcome foreign capital, which can help finance much-needed investment. But the recent surge has them worried, partly because of its speed and fears of an equally rapid reversal. The IMF reckons that gross inflows have risen to 6% of emerging-world GDP in about a quarter of the time taken for a similar spike before the crisis. Policymakers also fear that this flood of capital could lead to asset-price bubbles and overvalued currencies. Many have implemented measures to stem the tide, from Brazil’s tax on portfolio inflows to Peru’s higher charge on non-residents’ purchases of central-bank paper.
• Such policies—particularly capital controls that apply specifically to foreign investors or treat them differently from nationals—have long been controversial. Countries that use them are often accused of doing so to keep their currencies artificially undervalued. Critics reckon that with their prospects improving emerging markets should just let their currencies rise. But emerging economies retort that the reason capital is flooding their way may have less to do with their long-term prospects than with temporary factors such as unusually loose rich-world monetary policy, over which they have no control. Adding to the confusion is the absence of any internationally accepted guidelines about what is acceptable when it comes to managing capital flows.
• The IMF is the natural arbiter of such issues. It has already stepped back a little from its historical antipathy to capital controls. In February 2010 a research paper by a team of economists at the fund led by Jonathan Ostry cautiously endorsed the use of controls in situations where a country facing a capital surge had a currency that was appropriately valued, had already built up enough reserves and had no further room to tighten fiscal policy. The fund now reckons these conditions are not all that rare. It finds that 9 out of 39 emerging markets studied would have been justified, as of late 2010, in resorting to such controls because they had exhausted other options. There is a need, therefore, for more clarity on which measures are justified, and when.
• On April 5th the IMF released two documents designed to achieve just that. The  first, a “framework” for policy advice that is approved by the fund’s board, lays out the institution’s official thinking. The other, by Mr Ostry and his colleagues, provides the analytical backing for the framework paper and explains the conditions under which various kinds of policy instruments might help manage capital flows. The two papers aim to ensure that the advice the IMF gives member countries is consistent. But several curious differences between them suggest that the fund’s own thinking on managing capital flows is far from settled. In at least two respects the new paper by Mr Ostry’s team marks a further evolution of the fund’s position on capital controls. But the board-endorsed policy framework seems less inclined to budge.
• Earlier IMF papers emphasised that capital controls should be imposed only in the face of temporary surges in inflows, arguing that the exchange rate should adjust when it came to permanent shocks. But Mr Ostry’s team now points out that persistent inflows might be even more dangerous in terms of asset-price bubbles. It concedes that controls may be useful to target inflows that are expected to endure, because of the threat to financial stability. The framework paper is much more conservative, arguing that capital-flow measures “are most appropriate to handle inflows driven by temporary or cyclical factors”.
• The IMF has historically been more favourably disposed towards “prudential” measures, which are designed to stop inflows from destabilising financial systems and do not explicitly discriminate between residents and foreigners, than towards capital controls, which erect barriers designed to stop the exchange rate from rising. Mr Ostry and his colleagues point out that some prudential measures distinguish between local-currency and foreign-currency transactions. This makes them more like capital controls since most foreign-currency liabilities are likely to be owed to foreigners. It may thus make sense to treat such prudential measures and capital controls similarly. The framework paper, however, maintains that countries should “give precedence to capital-flow measures that do not discriminate on the basis of residency (such as currency-based prudential measures)” over those that do. The disconnect is glaring and confusing.
• The fund’s attempts to flesh out what countries threatened by a surge of capital should do come up against a more fundamental problem, too. Many emerging economies argue that the IMF is focusing on the wrong players. Mr Nogueira Batista told a Brazilian newspaper that he objected to “countries that adopt ultra-expansive monetary policy to get over the crisis [and] provoke an expansion of liquidity on a global scale”, and which then insist on guidelines about how recipients should behave. (Indeed, emerging economies were firmly opposed to the fund’s original plan to refer to what is now a “framework” for policy advice as the more prescriptive-sounding “guidelines”.) The fund acknowledges that these “push factors” are important, and should be addressed. Its own analysis suggests that American interest rates have a larger effect on flows to emerging economies than those economies’ own growth performance.
• A fund insider says that negotiations around the new framework on capital-flow measures were “the most contentious that any staffer can remember”. It shows.

interest rates and the economy

• In November 2003 the Bank of England’s monetary-policy committee (MPC) raised interest rates by 0.25%, the first increase in almost four years. With hindsight, it seems a straightforward decision. The economy was growing steadily, unemployment was low, house prices were shooting up and banks were lending freely. Yet at the time there was great anxiety about the change. The fear was that the increased burden of consumer debt would make even a small rise in interest rates bear down heavily on spending.
• That worry is all the greater now, as the bank contemplates a similar move. As The Economist went to press on April 7th the MPC was expected to keep its benchmark rate at 0.5%—but a quarter-point increase seems likely as soon as next month. Debt is worse, relative to incomes, than in 2003 (see chart). Other pressures on household finances are greater now than then. Wage growth is sluggish; inflation is far higher; job prospects are poorer. And taxes are going up. In the circumstances, an increase in interest rates could easily provoke a damaging cutback in spending by nervous consumers. One big, if subtle, reason for concern is the stark polarisation between the cash-rich and the debt-poor.
• If each household had an equal share of the cash and debt held by all, there would be little to worry about. True, personal debt is around 1.5 times post-tax income, which means that a percentage point increase in interest rates, if fully passed on by lenders, would take up 1.5% of income in higher debt-service costs. On the other hand, the income effects of interest-rate changes do not work in only one direction. Households in aggregate also have large cash deposits, and higher interest rates raise the income that is earned on them. The stock of cash is a bit smaller than the stock of debt, so the overall effect of interest-rate increases would be to depress household income. But as long as deposit rates rise in tandem with borrowing costs, the cost of a percentage point rise in rates would be less than 0.3% of incomes.
• That reckoning, however, understates the likely impact. Analysing the debt and cash holdings of all consumers lumped together reveals little about the effect of interest-rate increases on spending. That actually depends on how the aggregate cash hoard and debt burden is divided.
• People typically do not have both large debts and piles of cash, since it would make sense to use the latter to pay off the former. Rather there is a financial spectrum with, at one end, debt-laden householders, usually young, who have recently taken on a hefty mortgage and have little spare cash; and at the other end, older savers who have paid off their mortgages, or who have traded down to smaller homes and banked the proceeds.
• These different sorts of consumers will respond to interest-rate increases in ways that are unlikely to be neutral for the economy. The indebted will cut their spending to free up the extra cash to service their loans. Once rates start to rise, those with the biggest debts might be anxious to save harder to pay down those debts at a faster pace. At the other financial pole, the cash-rich and debt-free (by definition savers not spenders) might well spend little, if any, of the extra income they gain from higher deposit rates.
• Any squeeze on debtors’ incomes might be mitigated if banks chose not to pass on any increase in funding costs stemming from higher base rates. That scenario is optimistic. The gap or “spread” between the Bank of England’s rate and the average interest rate on mortgages (which account for four-fifths of household debt) has narrowed a bit recently, though it is much higher than before the financial crisis. This narrowing owes little, it seems, to banks competing more vigorously for mortgage business. Rather it reflects lower rates for borrowers whose fixed-rate deals had expired and lapsed into cheaper variable-rate mortgages.
• In one sense, this is helpful: it has lifted the incomes of some borrowers at the banks’ expense. But it has also made the economy more sensitive to changes in short-term interest rates. Before the crisis, around half of mortgages were at variable interest rates; by the end of last year, the share had risen to 69%. This greater sensitivity is heightened by the fragile state of Britain’s housing market. Higher rates will crimp the already-weak demand for homes and weigh on house prices—perhaps spurring anxious borrowers to spend less and pay off their mortgages quickly.
• A big enough interest-rate shock would start a downward spiral in debtors’ finances, spending and house prices. Rising defaults would exacerbate the damage. For this reason, the MPC is likely to tread carefully. The “glacial pace” at which interest rates are likely to rise—perhaps 0.25 percentage points every three months or so—is unlikely to be dangerous, reckons Kevin Daly of Goldman Sachs. If spending suffers unduly, “the MPC would be able to deal with it,” he says.
• The polarisation of household finances that makes the impact of a rate rise so uncertain also helps to explain why some MPC members feel the need to act. Debtors are hoping that interest rates stay low, but savers and bondholders need to be reassured that today’s high inflation won’t be allowed to persist. A small rate increase would be a victory for savers. The needs of the economy mean that, overall, monetary policy will continue to favour debtors.

falling public support for capitalism.

• Rising debt and lost output are the common measures of the cost of the financial crisis. But a new global opinion poll shows another, perhaps more serious form of damage: falling public support for capitalism. This is most marked in the country that used to epitomise free enterprise. In 2002, 80% of Americans agreed that the world’s best bet was the free-market system. By 2010 that support had fallen to 59%, only a little above the 54% average for the 25 countries polled. Nominally Communist China is now one of the world’s strongest supporters of capitalism, at 68%, up from 66% in 2002. Brazil scores 68% too. Germany squeaks into top place with 69%.
• France, one of the world’s strongest economies, continues as an anti-capitalist outlier. Only 6% of French “strongly” support the free market, down from an already puny 8% in 2002. Add those who “somewhat agree” with capitalism’s superiority and the figure is 30%, down from 42% in 2002. Turkey (another free-market success story) had the same level of support then, but it has dropped even lower, to a mere 27%. In Europe only Spain seems to buck the trend, rising from 37% in 2002 to 51% . Indians, on paper big winners from free-market reforms, appear unimpressed: support has dropped to 58% from 73%.
• Capitalism’s waning fortunes are starkly visible among Americans earning below $20,000. Their support for the free market has dropped from 76% to 44% in just one year. The research was conducted by GlobeScan, a polling firm. Its chairman Doug Miller says American business is “close to losing its social contract” with average familie

Big oil firms are offloading their refineries to different kinds of buyer

• The twinkling lights of an oil refinery at dusk show the potential for beauty in industrial landscapes. But the dramatic silhouettes, part ocean liner, part funfair, disguise the difficulties within. Decades of poor returns from turning crude oil into petrol, diesel and other fuels have convinced the Western oil giants to get out of the business. In their place come mainly state-run oil firms from Asia, the Middle East and Latin America, and private equity
• Essar, an Indian conglomerate, this week paid Shell $1.3 billion for the Stanlow refinery in north-west England. In February, state-owned PetroChina paid $1 billion for a half-share in Scotland’s Grangemouth refinery and in another at Lavéra in the south of France. Many more refineries are for sale in Europe and America. Britain’s BP, which is raising cash to pay the bill for the Deepwater Horizon oil spill, wants to sell two huge ones in America. Valero, an American refiner, may show interest, though it has just bought a plant in Wales from Chevron for $1.75 billion.
• American private-equity firms may also be taking a look at BP’s plants. According to FACTS Global Energy, a consultancy, over the past two years private-equity buyers have snapped up refining capacity of around 1m barrels of crude a day (b/d). State-backed oil companies, such as PetroChina and Russia’s Rosneft, have bought nearly the same amount.
• The refining business has suffered from chronic overcapacity, and thus weak margins, since the 1970s oil shocks, which led to a slump in the use of oil-based fuels for generating electricity and heating homes. A respite came in 2005-07, as a buoyant rich world and increasingly thirsty emerging economies boosted demand. But that was a high point that the rich world may not hit again. Demand for petrol in America has fallen, and may never regain its previous peak. Refining margins, having touched $4.50 a barrel, are down to one-tenth of that and still falling.
• It makes sense for big Western oil companies to get out of such an unprofitable business and put the capital into exploration and drilling. But refineries’ weak margins are not deterring oil firms from emerging economies from buying them. One reason is that they are going cheap. This gives the buyers access to declining but still sizeable rich-world markets. Such access is especially useful for those with ambitions to become global oil traders.
• As they buy refineries abroad, emerging-market firms continue to build them back home, where demand is still booming. For those firms owned or backed by their home governments, there are other considerations besides commercial ones. China, although it is set to remain a big importer of crude, is desperate to become at least self–sufficient in refining. By 2015 it will boost its domestic capacity by 20%, taking the total to 12m b/d. Middle Eastern oil producers are also building refining capacity to add value to the crude that they pump out of the ground.
• All this extra capacity will keep global refining margins under pressure for at least another five or six years, believes Francis Osborne of Wood Mackenzie, a consultancy. That may not bother state oil companies much, but it ought to worry private-equity firms. So why are they buying? First, because prices are so low. Second, because they are looking optimistically to the long term. Martin Brand of Blackstone, a private-equity giant that has bought three refineries in America in recent years, thinks margins will have recovered in ten years’ time, and in the interim there will be plenty of efficiency gains to be made.
• Others are sceptical. The European and American refineries’ new owners will be far less likely to close them than their old ones. In the absence of such a rationalisation of capacity, thinks Gemma Gouldby of FACTS Global Energy, margins will stay poor indefinitely. If so, the Western oil majors will be glad they got rid of them.

struggle of sense to get out of negative bias

• The markets continue to trade volatile in the negative terrain, but above their intraday lows. At 11:05 a.m., the Bombay Stock Exchange’s Sensex was at 19,555.70, down 56.50 points or 0.29% from the previous close, while the National Stock Exchange’s Nifty was at 5,874.30, down 17.45 points or 0.3%.
• Indian shares eased a tad on Thursday as investors were in consolidation mode after a big rally in March, while underlying sentiment remained upbeat following a spurt in foreign fund buying.
• Maruti was trading down 1.3 percent at 1,277.95 rupees after the company said it would recall 13,157 diesel engine cars.
• Foreign funds have pumped around $2.8 billion into equities since the start of March, after being net sellers in the first two months, on hopes a market correction made the market attractive given economic growth was still robust.
• Global demand for dairy products will jump in the next decade, led by surging consumption in China and India, according to Fonterra Cooperative Group Ltd, the world’s largest exporter.
• Oil dropped from the highest in 30 months in New York after China raised domestic fuel prices and U.S. stockpiles climbed, stoking speculation demand may falter in the world’s biggest energy users.
• Gold declined on speculation that investors are locking in gains after the price rose to a record earlier, and as central bank efforts to combat inflation curbed demand for precious metals.
• Asian stocks rose as the yen weakened against all of its most-traded currencies and after gold prices rose to a record for a second day in New York on demand for the precious metal as a hedge against inflation.
• Indian imports of power-station coal rose by 33% to 65.7 million metric tons in the year ending March 2011 from 49.4 million a year earlier, India Coal Market Watch said, citing estimates based on port data.
• World trade will grow faster than the 7 percent long-term average rate for a second successive year in 2011 but fall short of last year’s dramatic rebound, the World Trade Organisation is likely to forecast on Thursday.
• China may be heading for a pause in its half-year cycle of monetary tightening, raising interest rates just once more this year as its moves so far start to slow inflation and economic activity.
• The U.S. economy remains too fragile for the Federal Reserve to begin raising interest rates, the president of the Atlanta Fed, Dennis Lockhart, said on Wednesday.
• Portugal’s decision to seek international aid removes a cloud of uncertainty over the euro zone and has a good chance of ending the spread of debt market crises to fresh countries in the region.
• Chinese economy probably grew less quickly in the first quarter of this year than the final quarter of 2010, dovetailing with the government’s efforts to shift more emphasis to the quality rather than the pace of growth.
• Portugal’s caretaker government, fighting to avoid a bailout, said on Wednesday a political crisis had caused “irreparable damage” after borrowing costs rocketed as it sold a billion euros in short-term debt.
• The euro will steadily lose the recent ground it has gained against the dollar in the coming year as the U.S. Federal Reserve plays catch-up to the European Central Bank’s interest rate hikes, a Reuters poll found.
• India’s record grains output in 2011 may prompt the government to allow wheat exports, Farm Minister Sharad Pawar said on Wednesday, boosting the prospect of overseas sales of the grain from the world’s second – biggest producer.
• Some of Asia’s emerging economies are showing signs of overheating, underscoring the need for further policy tightening and more flexible foreign exchange rates to tackle growing inflationary pressures, the Asian Development Bank said on Wednesday.
• U.S. congressional negotiators on Wednesday raced against a looming deadline to agree on billions of dollars in spending cuts and find a budget deal that keeps the federal government operating beyond Friday.
• Europe has opened flat and is trading mixed. The Indian market is now in the green but still in flat territory with the heavyweights proving to be a drag in today’s trade. Sensex is trading at 19624, up 12 points from its previous close, and Nifty is at 5896, up 4 points.( 01:23 pm,india).
• Leading India Inc representatives today made a strong plea to the Reserve Bank to review its rate tightening policy, saying the high cost of credit is having an adverse impact on growth.
• Cairn Energy and Vedanta Resources on Thursday extended the deadline for a $9.6 billion deal for Cairn’s India assets, reflecting optimism the deal will get done a day after the government deferred a decision. Both companies have extended the date by which all conditions must be completed or waived to 20 May 2011 to accommodate the completion of the open offer for Cairn India shares, Cairn Energy said in a statement.
• Food inflation fell to 9.18 per cent for the week ended March 26, the lowest level in almost four months, on the back of a decline in the prices of pulses.
• The European Central Bank is poised to raise interest rates from a record low 1.0 percent on Thursday and more is likely to follow but, fearful of heaping more pain on the euro zone’s stragglers, it will give few clues about when the next move will come.
• Maruti Suzuki India (MSIL), the country’s largest car maker, on Wednesday said it wouldrecall 13,157 diesel cars manufactured between November 13 and December 4, 2010, to examine a possible faulty engine part.
• The foreign institutional investors (FIIs) were net buyers of Rs 150.85 crore in futures and options segment on Wednesday.According to the data released by the NSE, FIIs were net sellers of index futures to the tune of Rs 117.33 crore, while they sold index options worth Rs 587.96 crore.They were net sellers of stock futures to the tune of Rs 305.01 crore and sold stock options worth Rs 14.77 crore.
• Oil producing countries that have surplus production capacity provided international oil companies with additional quantities of crude, UAE Energy Minister Mohammed bin Dha’en Al Hameli has said.Addressing the 12th International Oil Summit in Paris on Wednesday, Al Hameli said that OPEC members are not the only producers that are providing additional supplies, noting that non-OPEC supplies were expected to reach 500,000 barrels a day this year.
• The Union government has slapped an excise duty of 10% on jute products that constitute about 80% of the Rs 6,000 crore industry and threatens to cripple the fate of 2.5 lakh workers.