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watz the mean of huge $s coming in India

CA. Dashrath Maheshwari (TaXpert) (15065 Points)

02 November 2007  

Is it good for our Economy or Bad, what is the reason for either?

Why our Economy is Booming at this time?

 5 Replies

C.A Mahesh G.Makhijani (Service) (26 Points)
Replied 02 November 2007


Ankit Dangayach (Chartered Accountant) (691 Points)
Replied 03 November 2007

India is centre of attraction for the entire world .Every MNC wants to enter the India as our GDP is growing at a very high rate and in next 3 decades we will become superpower of the world .We have the second largest population in the world and favourable demographic position where majority of people are young and wants to earn and enjoy ,thus we are among the largest consumers in the world.Our capital market speaks that our economy is booming as corporate profits are growing at 20-25% YOY.Indian companies are now more confident then ever before and purchasing companies abroad to become Global companies.India is the country where worlds richest person Mukesh Ambani resides.Huge employment opportunities are created in the country .We are receiveing huge Money from abroad in the form of External Commercial Borrowings,FDI Investment,Foreign Portfolio Investment from FII,NRI Deposits and because of High Growth in Service sector Exports.There are both positive and negative consequences of such huge Inflows of foreign Money.

Positive consequences:1) India requires Approximately 500 Billion USD investment in Infrastrcture sector alone in next 5 years for sustaining present high growth rate of appox 8-9%.Such huge mobilisation of resources is not possible from our internal resources so we need foreign capital in the form of ECB and other foreign loans & Aids.
2)Inflows in the form of FDI investment helps in generating huge Employment oppotunities and helps the country to become self reliant.China's entire growth story revolves round the huge FDI which it received in last 12 years.

Negative Consequences:
1)Managing the inflow of huge foreign capital is a problem for RBI .

2)Our capital account is partially convertible so there are restrictions on outflow of capital from india but inflows are coming at a brisk pace due to this mismatch our Rupee is appreciating however recently RBI takes steps towards moving to fuller capital account convertiblity.Appreciation of rupees is cause for concern for export driven Industries like Textiles,Pharmaceuticals,leather,Technology and other export dependent sectors which derive large part of there revenues from exports.Because of rupee appreciation net amount realised by exporters in INR is less and because of huge competetion from china and other countries they cant increase the prices of there products in USD also.Because of losses suffered by exporters from appreciating Rupee espectially in industries where margins are low like textiles and leather exporters start retrenching there employees which create unemployment and also increase trade deficit as our exports will fall.

So we can conclude that Foreign capital is good for the growth of the country like INDIA if it received more for the pupose of Building infrastructure and industries and less for speculation in stock market or in Real estate sector.

Late CA Sampat Jain (Chartered Accountant) (4767 Points)
Replied 03 November 2007

10 reasons for increased Investment in INDIA Today's India is a land of huge opportunities for global investors. The reforms process that the nation embraced a decade ago is now paying off. India's economy is sizzling and is one of the fastest growing in the world. It has also seen a surge in foreign investment lately. Umesh Kumar, Joint Secretary (Department of Industrial Policy and Promotion), Ministry of Commerce & Industry, made a presentation at a Confederation of Indian Industry conference on October 29. , during India Shining Comapaiigns ......... . LOT OF IT STILL HOLDS GOOD He listed the key reasons why India is a great place to invest, how the nation has liberalized norms for foreign investors, and what is on offer for foreign investors. 1. YOU NEVER HAD IT SO GOOD: „h India is the 4th largest economy, in terms of purchasing power parity. Tenth most industrialized economy. „h Strong macro-economic performance. „h Political stability and broad consensus on reforms. Liberal and transparent foreign investment regime. „h Well developed banking system. Vibrant capital market. National Stock Exchange third largest, Bombay Stock Exchange fifth largest in terms of number of trades. „h Strong and independent judicial system. „h Among the highest rates of returns on investment. Profitability of US investments in India: 19.33% in 2000 (according to US Department of Commerce). 2. INCREDIBLE SKILLS ON OFFER: „h Strong pool of scientific and technical manpower. Prowess of IITs, IIMs well known. „h 255 Fortune 500 companies getting services. „h 2nd largest English-speaking population. „h Abundant, high-quality, cost-effective, competitive manpower. Over 100,000 IT professionals added each year. „h India rated as the most attractive destination for offshore business processing by global consultancy A T Kearney. „h IT Industry $14 billion; growing at 50% p.a. „h Exports $12 billion; 2008 exports target: $60 billion, to be 35% of India's total exports. „h Job creation: a million direct & 2-3 million indirect 3. HIGHLY COMPETITIVE ENTREPRENEURSHIP: „h Prevalence of foreign technology licensing - Rank 1 in the world. „h Availability of scientist and engineers - Rank 2. „h Quality of management schools - Rank 9. „h Firm level innovation - Rank 12. „h Firm level technology absorption - Rank 16. „h Company spending on R&D - Rank 32. (Source: Global Competitiveness Report, 2003) „h India amongst the leading entrepreneurial hotbeds globally. (Red Herring clubs India with Israel 4. GREAT MACRO-ECONOMIC SHOW: „h India among world's fastest growing economies. (Graph on top left shows Indian GDP growth since 1996-97). „h Average GDP (gross domestic product) growth of 5.4% during the 9th Five-Year Plan (1997-2002). „h Exports registered growth of over 19% in 2002-03. „h Foreign exchange reserves at an all-time high of over $90 billion. „h Increase in forex during the fiscal year in 2002-03: $20 billion. „h India's economic growth is sustained. „h The nation's GDP is expected to grow by over 7.0 % this year. 5. EASY INDUSTRIAL LICENSING POLICY: Under the Industries (Development & Regulation) Act, 1951, industrial license is needed only for items: „h Falling under the list of compulsory licensing. Reserved for small-scale sector. If location attracts restriction. „h All industries exempt from industrial licensing required to file an Industrial Entrepreneur Memorandum. „h No approval is required; Only notification need. Industries retained under compulsory licensing under the Industrial (D&R) Act, 1951: „h Distillation and brewing of alcoholic drinks. „h Cigars and cigarettes of tobacco and manufactured tobacco substitutes. „h Electronic aerospace and defence equipment. „h Industrial explosives; Hazardous chemicals. 6. MAJOR FINANCIAL SECTOR REFORMS: „h Setting up of the Competition Commission; Amendments to Companies Act, Fiscal Responsibilities, and Securitization Act for creditors' security. „h Board for Industrial & Financial Reconstruction to be repealed. Computerization of Customs interface. „h Stable tax regime. Only 3 rates of indirect tax. Trade facilitation measures introduced. „h Foreign Exchange Management Act, 1999 provides a liberal regime; forex procedures eased. „h Stocks can be sold on the without prior approval. „h Profits, dividends and capital investment can be repatriated. „h Royalties can be paid by wholly owned arms to parent companies. 7. TRADE POLICY RATIONALIZATION: „h Trade policy liberalized. Most items on Open General License. „h Policies fully compatible with WTO. „h Functioning of the Director General Foreign Trade (DGFT) computerized: „h All 33 locations are Web-enabled. „h 70% of the total transactions of exporters/importers are Web-enabled. „h Transaction time has reduced to just 6 hours. „h On-line banking fully integrated. 8. A PROACTIVE FDI POLICY: FDI under ¡¥Automatic Route,¡¦ except in areas: „h Attracting compulsory licensing; or for acquisition of shares in an existing company. „h Sectors not open to FDI. (Gambling, lottery, et cetera.) „h Investor can bring automatic route cases for Foreign Investment Promotion Board approval. „h Foreign technology collaborations freely allowed under automatic and government approval routes. India FDI Outlook „h India rated best destination for outsourcing and 6th most attractive destination for FDI, according to AT Kearney. „h Global competitive report ranks India at first place in terms of prevalence of foreign technology licensing. „h Among top 10 tourist destinations. Major destination for foreign venture capital funds. Pie chart, left bottom, shows country-wise FDI inflows. 9. GREAT INFRASTRUCTURE, AND A HELPING HAND: „h $12 billion Highways Development Programme. Over 13,000 Kms of Highways being developed. „h The Electricity Act, 2003 in place to facilitate reforms in power sector. Permits trading in electricity, captive generation freed from prior approval. „h Upgradation of airports at New Delhi and Mumbai. „h ¡¥Sagar Mala,¡¦ a major programme aimed at developing ports and shipping sector at an estimated investment of $22 billion. „h Major advances in telecommunications sector. Bandwidths of terabit available. Sharp decline in telecommunications costs. „h Foreign Investment Implementation Authority helps solve foreign investors' problems. It meets periodically with investors to sort out operational difficulties and facilitates implementation. „h An Empowered Sub-Committee of the National Development Council set up on creating an investor friendly climate and removing regulatory barriers to investments. „h Modernization of legislations on intellectual property. All IPR Laws are TRIPS compliant. Intellectual Property Appellate Tribunal functional. „h Simplification and re-engineering of work procedures. „h More information on www.ipindia.com 10. BOOMING SECTORS & OPPORTUNITIES GALORE: „h Roads: Capacity enhancement of highways. 7000 kms of National Highways being offered during the current year. Many more opportunities in the States. Opportunities for equipment manufacturers. technical support. „h Urban Infrastructure: Development of townships for the rapidly growing, increasingly affluent urban middle class. City level infrastructure. roads, bridges, IT Parks, sanitation and water supply, etc. Consultancy in urban planning. „h Ports: Government of India's initiative of developing ports ¡V ¡¥Sagar Mala' with an investment of $22 billion. Development of Ports. Shipping. Upgradation and operation of cruise terminal. Operation of Dry Port at Mumbai. „h Power: Addition of 100,000 MW required over the next 10 years. Installed capacity 106,000 MW. Hydro-electric initiative to develop 50,000 MW. Detailed project reports to be prepared to facilitate private investment. „h Telecommunications: Cellular phones increasing @ 1.5 million every month. To increase by 20 million this year. Figure to rise to 100 million in the next 3-4 years. Telephone connections to rise to 75 million by 2005 and 175 million by 2010. Investment Opportunities. Setting up manufacturing base. Value-added services.

Late CA Sampat Jain (Chartered Accountant) (4767 Points)
Replied 03 November 2007

Leveraging forex reserves smartly Tuesday, 06 June , 2006, 12:32 (SIFY) In February, China surpassed Japan to become the world's largest holder of foreign exchange reserves. According to the People's Daily, the official newspaper of the Chinese Government, this trend continued the following month, with foreign exchange reserves growing 32.8 per cent year-on-year to $875.1 billion. Concerned by the economic impact of such high levels of reserves, the National Bureau of Statistics announced that steps were being taken to "relieve the pressure". According to Zheng Jingping, spokesman for the National Bureau of Statistics, some of the steps include restriction on exports of high energy products, letting businesses and residents hold more foreign currency, and encouraging some qualified commercial banks to invest in overseas financial markets. While excess the forex reserves has been a recent cause for concern, it will bring increased pressure on the Chinese authorities, already facing fierce criticism over the rigid exchange rate policy. Gradual reform Defending the Chinese approach of gradual currency reform, Zhou Xiaochuan, Governor of the People's Bank of China, said in a recent speech that, "Under the managed floating exchange rate regime, the PBC will gradually reduce its managing role in the foreign exchange market in line with the situation, which will lead to a slower growth of the foreign reserves." Such a "gradualist" approach finds its roots in the chief architect of China's economic reforms, Deng Xiaoping, who famously described it as "fording the river by feeling for the stones." In the aftermath of the Asian financial crisis, central banks of Asian economies - including China and India - have maintained high levels of foreign exchange reserves to avert a possible currency crisis (see Graph). Though China and India were largely unscathed by the Asian crisis, their central banks have not taken chances either. What is particularly noteworthy in the case of China is the massive surge in foreign exchange reserves after 2001, the year it joined the World Trade Organisation. However, economists like such as Lawrence Summers, President of Harvard University, are now questioning the need and the economic rationale for holding such high levels of reserves. Using the Greenspan-Guidotti rule, he estimates that China holds 41 per cent excess reserves as a per cent of 2004 GDP. And that these excess reserves carry a huge opportunity cost that could well benefit the emerging economies if used in a long-term way, like such as investing in infrastructure. China's economic woes The current problems of the Chinese economy are complex. Apart from the everyday blame that China faces over the US current account imbalances, there is a genuine concern among experts over the overheating Chinese economy. |Hot Wheels: A Sify Special on latest 2-wheelers| China's State Administration of Foreign Exchange (SAFE) believes that the excessively huge trade surplus in China's balance of payments indicates the country's overcapacity - domestic savings have exceeded domestic investment. Huge inflows of foreign direct investment during the past five years, and overseas financing by Chinese firms have been the contributing factors. Over-investment has, thus, become a huge problem for the Chinese economy. The monetary authorities in China have taken cognisance of these problems and, recently, the People's Bank of China raised interest rates of RMB loans. Explaining the rationale behind the loan interest rates hike, a Bank official said that though the Chinese economy maintained a steady and double-digit expansion "some acute problems still existed in economic operation as fixed asset investment grew excessively, money supply hovered at a relatively high level and credit expanded faster than desired, all these factors need to be addressed attentively." In addition to the problems of over-investment and overcapacity, the malady of a fragile financial system makes the speculative flow of money a big cause of concern for the Chinese authorities. After the recent split share reform, experts are predicting a bullish Chinese stock market. Moreover, speculation on the prospects of a stronger yuan brings a lot of hot money into the market, causing further foreign exchange accretions. Keeping in mind all these factors, a huge stockpile of forex reserves has been thought of as a prudent policy measure. But the current level of reserves are much more than what would be prudent. Therefore, it would make good economic sense to use significant portions for productive purposes. Lessons for India Compared to China, India's foreign exchange reserves are relatively small but have significantly increased over the years. From just $27.355 billion in December 1997 (at the time of Asian financial crisis), India's forex reserves have risen to $162 billion this May. In 2003, the IMF lauded India's reserve management policy and compared it to global best practices. The Reserve Bank of India has since then consistently seen accretion to the forex reserves while maintaining an appropriate level of import cover and effectively securing monetary stability. There is an opportunity thus to use the excess reserves for infrastructure purposes, as suggested by the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia. Lawrence Summers, while delivering a speech at the RBI this March, said that if India can put to effective use the excess reserves, the returns could be as high as 1-1.5 per cent of GDP each year. Summers has estimated that India's forex reserves are in excess by 15 per cent of 2004 GDP. | Go to Sify Business Home page | India is, therefore, clearly missing an opportunity to give a boost to building the appalling infrastructure by using the excess reserves. What is surprising is that, the Prime Minister, Dr Manmohan Singh, instead of putting the idea to work at home, has been trying to push this design through a pan-Asian FTA. While the complexities and the lack of political will for such a free-trade agreement are now clearly evident, it is time the Prime Minister realised the opportunity cost of excess reserves and put them to use for immediate gains. Different approaches Both India and China must recognise the opportunity cost of excess foreign exchange reserves. However, the use of these excess reserves will differ from country-to-country and would depend on the prevailing economic conditions. The current complexities of the Chinese economy are generic - over-investment, high current account deficit and a fragile financial system - and therefore compel the Chinese Government to follow a rigid exchange rate policy that can support its export-led involuted growth. Therefore, China prefers to maintain high levels of reserves to avert any external debt crisis and to deal with contingencies or financial risks. A steady and fast growing Chinese economy is what the world needs, for, if the Chinese growth engine sputters, it could just trigger problems for all the major economies of the world. India, on the other hand, is well poised to take advantage of its excess forex kitty. A fast growing economy, a strong financial system, and stable monetary conditions are just the perfect prerequisites for any action in this regard.

Late CA Sampat Jain (Chartered Accountant) (4767 Points)
Replied 03 November 2007

Foreign exchange conundrum 16 Oct, 2007, 0037 hrs IST,M K VENU, TNN Last week finance minister P Chidambaram clearly spelt out, for the first time, that the rupee's exchange rate was not in a comfort zone. The sudden surge of capital flows into India following the recent US interest rate cut - more so in the past ten days - has thrown policy makers and the RBI a bit off gear. The exchange rate had moved pretty close to Rs 39 to a dollar mark intra-day even as the Sens*x had begun to show signs of flirting with the 20,000 mark. More interestingly, the Sens*x surged even more as political uncertainty heightened, clearly indicating that it was ignoring the politics of the day. Just look at how things have changed. The finance minister's statement indicating that the rupee may have appreciated more than required resulted in a fairly sizeable correction in the Sens*x - of over 380 points. This was done deliberately to cool the markets. The government today can afford the luxury of seeking such corrections. We may have entered a new phase of talking markets down. From a policy standpoint, both the finance ministry and RBI would want capital inflows to be more predictable. Last fortnight, the finance ministry substantially increased the Market Stabilisation Scheme (MSS) quota of government securities with the RBI from Rs 1,30,000 crore to Rs 2,00,000 crore. This was the first real signal that the government perhaps wanted the RBI to hold the exchange rate closer to Rs 40 by using the enhanced MSS securities, which would help suck in excess liquidity caused by the central bank buying more dollars. Surely, the RBI could buy more dollars in the weeks to come if capital inflows remain of a high order. The finance minister's statement on the exchange rate sets at rest some doubts about the exchange rate policy. The government is now very clear that appreciation of the rupee beyond the present levels could hurt the exporters at large. The commerce secretary last week formally announced the scaling down of the export target. Of course, till sometime ago it was being argued that exchange rate policy cannot be looked at from the exporter's perspective alone. After all, imports far exceed exports and an appreciating currency makes imports cheaper, and helps bring down overall prices. Inflation is the biggest tax on the poor, it was argued. This line of thinking had more currency till sometime ago when the inflation rate was somewhat on the higher side and industrial growth was still robust. However, in the past two months or so, the situation has changed. Industrial growth has shown some signs of slowing across several sectors. And the inflation rate has fallen to below 4%. This has caused a tilt in favour of the argument that the exchange rate must not be allowed to strengthen beyond the present levels. The more important thing now is to pump up exports and industrial growth, both of which are showing signs of decelerating. Small scale exporters have particularly suffered as they don't have a sophisticated hedging mechanism. In fact, the RBI is looking at a system where small exporters can invoice their exports in rupees, rather than dollars. This will protect their earnings and some banks could offer them this product for a fee. Therefore, the new line of thinking is to keep the exchange rate at levels that maintain export competitiveness in the medium term. Azim Premji said something very relevant in this regard. He argued that in spite of the strengthening rupee exporters can indeed protect their margins through higher productivity, but they need time to adjust. The government appears to have understood this logic. The prime minister's economic advisory council is believed to hold the view that if the rupee appreciates further the overall damage to the economy could be high. However, if the RBI holds the rupee at present levels by buying dollars and sucking in excess liquidity through the MSS scheme, there is a fiscal cost, but larger damage to the economy will be prevented. The fiscal cost roughly is the interest the Reserve Bank earns on deploying the reserves in dollar, euro- and pound-denominated securities and what it pays for sucking out domestic liquidity through release of securities. On a weighted average basis, this works out to about 3%. So after fully utilising the Rs 2,00,000 crore of MSS securities, the RBI will incur a cost of about Rs 6,500 crore. The cost is more manageable than the overall damage to the economy caused by the exchange rate strengthening to, say, Rs 37 to a dollar. This seems to be the thinking at the current juncture. However, the market dynamics may still run ahead of the policy makers, as is always the case. The market still believes that the exchange rate will indeed strengthen further in the months to come. India could be at a stage, like many developed economies were some decades ago, when the exchange rate remained a one way bet for a long time because of surging productivity.

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