ECOTIMES24SEP13
FIIs Gung-ho on Exports, Consumption Themes
OUR BUREAU MUMBAI
Foreign institutional investors (FII) are attracted by the twin themes of exports and domestic consumption. An ET
poll of 12 top foreign money managers indicates their preference for IT and pharma firms — whose fortunes have
been boosted by the cheaper rupee — as well as consumer goods and retail companies, despite the rich valuations in
both the sectors. The possible election of Narendra Modi as prime minister in the 2014 elections will have a positive
impact on the economy and markets, 64% of the poll participants said. Modi, the chief minister of Gujarat, is the
BJP’s prime ministerial candidate for the 2014 elections.
All those polled believe the US Fed will start tapering from December. A majority of them say the tapering,
worsening of non-performing accounts (NPA), a rise in the current account deficit (CAD) and sovereign downgrade
are the biggest threats to FII flows. Most participants expect the RBI not to cut interest rates at least till December
because of high inflation. Close to 55% say inflation will remain between 6% and 6.5% in FY14, and 70% say the
repo rate will continue at 7.5%. The only relief to the Indian economy, according to the FIIs, is the stabilising rupee.
A tad less than half expect it to stabilise at 60 against the dollar by December. If this were to happen, FIIs would be
more positive on India and may increase stake in Indian companies.
The participants of the poll were BNP Paribas, Capital First, Citigroup, CLSA, Credit Suisse, Deutsche Bank,
HSBC, India Capital, Merrill Lynch, Mirae, Morgan Stanley and UBS. “Our interactions with FIIs suggest most of
them are underweight on India due to concerns on the currency and weak corporate earnings growth prospects. But,
this also represents potential upside as most of the negatives appear priced in and if the rupee stabilises and we see
further progress on economic reforms, then FIIs would look to increase exposure to India.” said Pratik Gupta,
managing director & head of equities, Deutsche Bank. FIIs Prefer IT Services, Pharma Nearly 58% of the FIIs
rank India in the top three among emerging markets
The rupee, whose descent to record low of 68.83 against the dollar on August 28 had battered stock markets and
threatened to widen the current account deficit, has since recovered 9% to close at 62.60 on Monday.
The Indian stock market has seen a sharp rebound, aided largely by positive global factors and domestic policy
measures.
After having corrected 14% from its July highs till August 28, the Sensex has recovered nearly 11% since then. The
rebound followed the US Fed’s decision to not reduce its bond purchases for now and new RBI governor Raghuram
Rajan’s announcement of measures to encourage US dollar inflows and stabilise the rupee.
A little more than half of the participants feel India will grow between 4% and 4.5% in FY14 and three-fourths of
the foreign fund managers expect Sensex to end 2013 between 18000 and 20000 levels.
The slowdown in corporate earnings, worse-than-expected macro economic indicators and policy paralysis are the
predominant concerns about the Indian market, say experts.
“There are two realities investors must comprehend when evaluating investment in India — growth will slow further
over the next 2-3 quarters as a natural corollary of CAD/fiscal consolidation, though mediumterm growth potential
remains intact and crisis from external shock remains a low-probability event in our view,” said Gautam
Chhaochharia, head of research at UBS.
Despite high valuations, FIIs prefer to invest in expensive sectors such as IT services, pharma and consumer goods
apart from banks.
Nearly 58% of the FIIs rank India in the top three among emerging markets. “India’s economic growth potential
over medium term and some individual stocks compare favourably with other emerging markets. India’s external
vulnerability is higher than a lot of EMs, and in terms of market performance, India is not at the bottom this year,
even in $ terms,” said Chhaochharia of UBS.
All those who participated in the poll said that FII inflow in 2013 would be lower than in 2012.
RBI Now 100% Against 0% EMIs for Consumer Goods
Dampener ahead of festive season as banks withdraw finance schemes
WRITANKAR MUKHERJEE & ATMADIP RAY
KOLKATA
Planning to buy a phone or a television during the upcoming festive season? Don’t bet on paying off the bill in
interestfree instalments. These schemes are being withdrawn as the Reserve Bank has frowned on the practice of
banks tempting consumers to make big-ticket purchases by offering to break up credit card payments into EMIs.
RBI feels consumers have been fooled by zero per cent or discounted interest rate schemes into believing that
bank funding comes for free, and wants them stopped. Consumer durable manufacturers offer the zero per cent
facility mostly on high-value products such as smartphones, LED TVs and premium home appliances. “Such
schemes only serve the purpose of (luring) and exploiting vulnerable customers,” the central bank said in a
confidential note to banks on September 17. “These were found to be impinging on customer protection,
accounting integrity and thereby the fair market practices which banks should epitomise.” ET has a copy of the
note. There was no response from the central bank to queries regarding the note. Festive Sales Likely to be Hit
Due to EMI Move
The move by the central bank has panicked companies and retailers ahead of the festive season as nearly 20-30%
sales depend on EMI schemes. They’re worried that consumers will refrain from indulging in Diwali shopping
sprees, especially after the surprise interest rate increase by RBI on Friday heightened concerns over home and
auto loans becoming costlier. Looming over all of this is the growth slump that has got prospective buyers spooked
anyway.
“The way forward for the measures suggested by RBI is justified, but the notice given is so short ahead of the
festive season and in the middle of a dull economy, that sales are likely to take an instant blow,” said Himanshu
Chakrawarti, CEO at The Mobile Store, the country’s largest cellphone retail chain with more than 700 stores.
What may have prompted RBI to examine the finer details of such schemes is the 34% jump in bank loans for
buying consumer durables between July 2012 and July 2013 compared with a 12% rise in the year-ago period.
RBI said the interest component in a zero per cent scheme is often camouflaged and passed on to consumers in
the form of a processing fee. The concept of zero per cent interest is non-existent and fair practice demands that
the processing charges and rate of interest charged should be kept uniform across products and segments, it said.
The central bank has also barred banks from charging discriminatory interest rates on loans for all product
categories that don’t attract the zero per cent facility. It wants to stop the current practice where financing takes
place on the maximum retail price of the product and not the market price, and wants banks to pass on benefits
they get from retailers and brands to consumers.
When it comes to non-zero per cent schemes, retailers said banks charge consumers 4-7% interest, depending on
the product value and tenor. That’s much below the base rate, supposedly the minimum lending rate. “This vitiates
the transparency in pricing mechanism, which is very important to take (an) informed decision,” RBI said. Senior
officials at two leading retail chains said lenders, including SBI, Axis Bank and Kotak Mahindra Bank, withdrew the
zero per cent facility late last week after RBI’s note. Emails sent to ICICI Bank, HDFC Bank, Axis Bank and Kotak
Mahindra Bank did not elicit any response. Data available from retail chains
shows State Bank of India charges 4.25% interest per year for a sixmonth tenor and 6.35% for nine months.
HDFC Bank charges around 5.2% interest on six-month EMI schemes and 7.25% for nine months. For ICICI Bank, it
is 4% for six months and 6-6.15% for nine months.
A leading Japanese electronics company
has decided to put a complete stop to zero per cent EMI schemes, a senior executive said, adding this is likely to
hurt sales badly. “There will be a big impact on sales since the contribution of such schemes to our sales had
doubled to 20% in the last one year,” he said, requesting anonymity. RBI has directed banks to make pricing
transparent and inform consumers about the financial benefits they get from retailers and brands for offering zero
per cent interest on credit cards or interest rate discounts.
“It is the responsibility of the banks, who are/ may be using their good offices to get the better bargain, to make
the customers fully aware of these benefits and also pass on the benefits to them fully and indiscriminately. More
importantly, this has to be done without tampering with the applicable rate of interest of the product,” the note
said. Still, zero per cent schemes could make a comeback, just not in time for Diwali. It will take at least two
months for banks to revive the plan since they have to make amendments to such offers in their own system as
well as at the brand and retailer end, said the CEO of a leading multi-brand consumer electronics retail chain.
Meanwhile, RBI has also asked banks to terminate their relationships with merchants and retailers who charge an
extra fee on debit card payments as this isn’t allowed under bilateral agreements between banks and retail outlets.
Moody’s Downgrades SBI Debt Rating
Agency also cuts local currency deposit rating, changes financial strength outlook to ‘negative’ due to
asset quality concerns
OUR BUREAU KOLKATA
Moody’s Investors Service has downgraded State Bank of India’s (SBI) senior unsecured debt and local currency
deposit rating to ‘Baa3’ or lowest investment grade rating from Baa2 and changed the outlook on its financial
strength rating to ‘negative’ from stable, as the economic slowdown puts pressure on the credit quality of India’s
largest lender.
The revised rating is on par with Government of India’s (Baa3 Stable) foreign currency bond rating. However, the
outlook for SBI’s senior unsecured debt and local currency deposit is stable, Moody’s said in a statement issued
from Singapore. The global ratings firm said the combination of increasing pressure on credit fundamentals and
the ongoing reliance on the fiscally-constrained Indian government to maintain capital adequacy ratio (CAR) are
the factors behind the ratings downgrade at a level no higher than the sovereign.
In the last week of August, it lowered the outlook for India’s GDP growth to 4.5% from 5.5%, reflecting the
depreciation of the rupee which will put inflationary pressures and keep domestic interest rates relatively high.
“Such weaker conditions will negatively affect the asset quality, profitability, and capital of public sector banks,
including SBI,” it said.
SBI’s first quarter net profit dipped to . 3,241 crore from . 3,752 crore, as its gross non-performing assets ratio
slipped to 5.6% from 4.99% a year ago. Government banks have been facing strain in asset quality due to cash flow
mismatches for companies amid business downturn. A pile of restructured loans has made banks’ asset quality
more vulnerable.
The sluggish economic growth has already led to a sharp rise in NPAs for Indian banks, with the gross ratio
touching 3.9% in June. The Reserve Bank of India (RBI) estimated that gross NPA may rise to 4.4%, if the macroeconomic situation does not improve.
Moody’s expects SBI’s loans to grow at 20% for the fiscal year ending March 2014, exceeding Moody’s estimated
15% for the country’s banking system.
“Consistently high loan growth, together with rising problem assets, lower margins, and additional provisioning
requirements imply that SBI’s capitalisation levels will decline without external capital injections,” it said. It has
also downgraded SBI’s London and Honk Kong branches to ‘BAA3’ or junk from ‘BAA2’.
Growth Worries
• The revised rating is on par with govt’s foreign currency bond rating
• In the last week of August, it lowered the outlook for India’s GDP growth to 4.5% from 5.5%
• The sluggish economic growth has already led to a sharp rise in NPAs for Indian banks
HACKING THREAT
For a Unified Cyber and Telecom Security Policy
The preamble of the recently-notified National Cyber Security Policy states that information technology (IT) is one
of the critical sectors that resides in cyberspace. The main focus of the policy is the security of this sector. Another,
equally critical, sector that is now fully integrated with cyberspace is telecommunications. Telecommunications
and IT are extensively employed for computerised control and supervision of sectors like power, nuclear energy,
gas pipelines, etc, which are generally not connected to the internet, but are still vulnerable to malware attacks.
The need of the hour is to make all critical sectors secure. The two have converged because of the deployment of
internet protocol, not only on the internet, intranet and extranet, but also on 3G and 4G mobile networks. Except
the preamble, the rest of the policy document, which includes sections on visions, mission, objectives and
strategies, etc, mainly deals with cyberspace, which means public internet. Although intranet and extranet are
mainly private networks, there is an urgent need to frame a policy for their security as well. We live in times of
cyber warfare, which was started by US and Israeli security agencies when they jointly developed a malware called
Stuxnet in 2010 to sabotage the uranium enrichment facility at Nantz in Iran. Sometime ago, Chinese hackers were
able to hack the sensitive naval computer systems in the headquarters of the Eastern Naval Command at
Visakhapatnam, presumably to gather intelligence about India’s nuclear submarine programme. Last month, news
emerged on the hacking of sensitive computers at Barc/Isro. There are instances of massive explosions being
caused in gas pipelines by Stuxnet-like malware, as well as attempts to sabotage power supply systems. A separate
policy called the National Telecom Security Policy is being drafted by the DoT since 2011, and was recently
submitted to the National Information Board (NIB). According to reports, the NIB has returned the draft to DoT, to
address certain objections raised by the ministry of home affairs. The DoT should specifically address the issue of
acceptance testing to detect Stuxnet-like malware in imported telecom gear that can create a system crash in a
war situation, thereby affecting our defence. Mobile systems such as 3G/4G employ one of the most complex
industrial software ever developed, making it very difficult to fully debug and certify them as bug-free. Cyber
security standards and policies, which have evolved since 1994, mainly focus on detection of malware on web
clients and servers employing wellknown operating systems such as Windows. But there is no such standard for
telecom security certification, because of the proprietary nature of telecom software. As a policy, DoT has
mandated that all imported telecom equipment should be certified as bug-free. To implement this policy, DoT is
trying to set up a state-of-the-art security lab to test network gear used by mobile phone companies since the last
three years at the Indian Institute of Science, Bangalore, with the help of Chinese MNC Huawei, apparently on the
lines of a Huawei-run Cyber Security Evaluation Centre in the UK. The centre operates in close coordination with
GCHQ, the UK’s signals intelligence agency that evaluates equipment supplied by the Chinese MNC to British
Telecom. Since DoT plans to set up a generic security lab to evaluate and certify imported equipment from all
vendors, such a vendor-specific approach should not be adopted in India. Although DoT is now trying to rope in
private players like Wipro, it is difficult to set up a generic certification centre because of the proprietary nature of
telecommunication software. So, while it may be possible set up a software centre for a particular system with the
cooperation of a specific vendor, as was done in the UK, it may not be feasible to set up a generic centre to test
telecommunication gear imported from diverse vendors. Under the circumstances, the only feasible option is to
import equipment from trusted sources with manufacturing facilities in the country, including software production
facilities, and that employ Indian engineers.
The writer is former member, Trai, and Telecom Commission
Horrors of Nurturing Terror Organisations
The nature of the beast in Pakistan — which, again, claimed scores of minority lives on Sunday — is such that the
state it is fighting is complicit in letting it loose. That is a key fact which differentiates the terror unleashed in
Peshawar and that suffered by civilians in Nairobi, Kenya. In pure forms, both acts of savagery are based on the
ultra-extremist ideology that takes it upon itself to decide who is a Muslim, while making war on all others, be it
non-Muslims or different sects within Islam or generally anyone not within that crazed circle of selfdefined identity.
But al Qaeda-linked terrorists might be attacking Kenya because of the action Kenyan troops have taken against the
Somalia-based al Shabab group. In Peshawar, the brutality was probably committed by members of outfits that have,
at some point or the other, received state patronage, or at least were tolerated.
The original sin in Pakistan was the belief that extremist groups could be used as a tool of domestic and foreign
policy, and that they could always be controlled. Later, as some of the groups thus spawned widened their
operations, the logic of good extremist and bad extremist was applied. Even now, as the Pakistani state has acted
against the Tehreek e Taliban Pakistan (TTP) in some areas, it leaves it, and some of its affiliates, untouched in other
areas. Unless Pakistan, more so the army, abandons this devilish dual approach, it will keep bleeding.
Even as a senior general was killed, days before the massacre on Sunday, the Nawaz Sharif-led regime was talking
of negotiations with the TTP. That, instead, the beast needs to be tackled by junking the “dual approach” could be
impressed upon Sharif if PM Manmohan Singh meets him in New York, as they attend the UN General Assembly.
In fact, he should.
Uncertain times are forcing political parties to hark back to old shibboleths to grab power
Itwas in the packed hall of St Stephen’s College, among a barely-out-of-adolescence crowd, that I had a bit of an
epiphany. Listening to writer Amitav Ghosh talk about 25 years of his novel The Shadow Lines and watching girls
toying with their smart phones, I realised our political parties seemed to be at the same kind of crossroads as this
18-to-21-year-old crowd.
For this crowd, an existential crisis for identity was a natural step towards adulthood. Our political parties are in
an awkward phase, dithering between their traditional outlook, wanting to live up to what new India supposedly
wanted from them and also terrified of letting go of their past pretensions.
Out with the New
Look at the Samajwadi Party (SP), prototype A for those with an identity crisis. The SP’s longest calling card has
been its pro-Muslim, socialist image nurtured by patriarch Mulayam Singh who wrestles down any suggestion of
change, be it in the aspiration for English or in the use of computers. Then, around two years ago, his son takes
over and turns around that identity on its head.
Akhilesh tells us things have changed not just by his own Australian education but by also launching a scheme for
laptops. We don’t hear anything about Muslims in his speech, just about hope and employment, and we start to
think, yes, the heartland is changing. We forget that Akhilesh was failing to deliver on his promises and Daddy was
still the boss.
The SP still projected the new identity that was spun by Akhilesh and his IIM buddy and cabinet colleague
Abhishek Misra. Akhilesh spoke in Hindi, sure, but his wife and, why, even veteran Ram Gopal Yadav gave
interviews in English.
We were all getting used to this new mantra of the SP when last week, suddenly, Akhilesh pops up on our TV
screens wearing a skullcap. It could be that he was just seeing off Haj pilgrims in Lucknow and media caught him
there for his comments on Muzaffarnagar. But it could the identity politics of old.
Finding the Rout Cause
Recently, at a brainstorming session in Agra, SP-wallahs voiced their angst. Older voices like Abu Azmi urged the
party to forget laptops and dole schemes and go back to their roots. A newspaper reported them as saying, “We
want the old SP where Muslims felt safe.”
Akhilesh, young but not so fresh any more, had nothing to say. The SP is trying deal with the Muzaffarnagar riots,
even though its culpability extends to allowing the riots to happen and doing little to stop it quickly.
What about the Congress? Throughout the UPA regime, we’ve heard that it runs a pro-development, growthoriented government led by economist Manmohan Singh. Its spin doctors threw high GDP figures in our faces and
talked about the potential of the great Indian middle class and youth. Today, there’s a serious identity crisis
brewing.
Talk to a Congressman about 2014 strategy and you’ll hear echoes of Indira Gandhi’s “Garibi hatao” campaign,
“The poor person will know that at least we are supplementing their meal, that at least one daily meal is on the
UPA.”
The new — actually, the old — Congress identity is clear from the new Bharat Nirman ads: catering to deprived
people, offering identity cards and cash transfers. From being the party that liberalised and opened up the
economy, the rhetoric is back to the mai-baap state of the 1950s-70s.
The throwback to the 1970s and garibi references become specially stark in Rahul Gandhi’s recent speeches. He
not only improvises some old slogan about “eating one roti” but makes it very clear who he represents, “We
promise that our government will be a government of the poor, Dalits and adivasis.” So, the CII address was just a
gimmick?
Turning an Old Leaf
Between those going back to their Muslim vote bank and those claiming to be “soldiers” of the poor, lies the
identity crisis of the BJP. Just like the SP’s modern face was stripped away in Agra, the RSS men emerged after the
two-day meeting with BJP to clear any doubt about who calls the shots in the political party.
The party attacks the UPA on the economy, talks about governance, but in its internal meetings, it’s only
Hindutva that matters. India Shining didn’t work, and without a clear vision, the Temple is the only fallback. In
Parliament, it looks angry, disrupts sessions and then helps the Congress pass all its vote-getting Bills.
Here’s another dimension to the BJP’s crisis. Its prime ministerial candidate Narendra Modi was always known to
shun appeasement politics: his fans loved that he didn’t pander to minorities like other politicians and his men
wouldn’t even bother to campaign in Muslim-dominated constituencies. But in the last conclave, Modi told his
men to reach out to Muslims, “If 25% of them in Gujarat voted for me, why not in 2014 elections?”
Just like a college kid desperately looks around for a career choice to get his parents off his back, our netas are
desperate in this uncertain moment before 2014. And they’re nervous, as they look for an identity that has “one
size fits all” written all over it.
The writer is a broadcast journalist