12.11.2015, 12:58
Fitch: FDI, Power Measures Show India Retains Reform Momentum
OREANDA-NEWS. A major liberalisation of foreign direct investment (FDI) rules in India that was announced on 11 November is a significant structural macroeconomic reform, says Fitch Ratings. This, together with an earlier announced plan to restore the financial viability of the country's power distribution companies (discos), indicates that India's reform momentum remains intact.
Key changes to the FDI regime include raising the limit for FDI approvals from the Foreign Investment Promotion Board to INR50bn from INR30bn; increasing foreign-investor limits in several sectors including private banks, defence and non-news entertainment media; and allowing property developers to sell completed projects to foreign investors without lock-in periods.
The government's package to revive discos, announced on 5 November, also underscores the reform momentum. The heavily indebted discos of states that opt for the package will see 75% of their outstanding debt transferred to the states as part of an agreement between the power companies, the Ministry of Power and state governments, while the remaining 25% will be issued as state-guaranteed disco bonds. This could lead to higher general government debt of up to 2% of GDP, but this is not sufficiently significant to have an effect on India's ratings, especially with the potential positive longer-term effects of the reforms. Importantly, the reforms create an incentive structure for state governments to reduce losses at discos by requiring the state governments to assume a certain share of losses at these entities.
These changes align with the government's broad-based reform agenda, and should support investment and real GDP growth over the long term. Fitch has highlighted the implementation of structural reforms and boosting investment as an important credit factor for India, both to bolster growth and to reduce external vulnerabilities. We forecast Indian real GDP growth to come in at 7.5% this year and accelerate to 8.0% in 2016 and 2017.
The FDI and disco announcements highlight how the government can make reform progress using its regulatory and executive powers. However, other big reforms such as the implementation of a national value added tax, will require a two-thirds approval in the legislature and face stiffer political obstacles. The goods and service tax bill proposes a national GST to be implemented from April 2016. This is particularly significant for the economy - but more because it could contribute to diminishing inter-state trade barriers and creating a single internal Indian market, rather than strengthening the fiscal revenue base.
Key changes to the FDI regime include raising the limit for FDI approvals from the Foreign Investment Promotion Board to INR50bn from INR30bn; increasing foreign-investor limits in several sectors including private banks, defence and non-news entertainment media; and allowing property developers to sell completed projects to foreign investors without lock-in periods.
The government's package to revive discos, announced on 5 November, also underscores the reform momentum. The heavily indebted discos of states that opt for the package will see 75% of their outstanding debt transferred to the states as part of an agreement between the power companies, the Ministry of Power and state governments, while the remaining 25% will be issued as state-guaranteed disco bonds. This could lead to higher general government debt of up to 2% of GDP, but this is not sufficiently significant to have an effect on India's ratings, especially with the potential positive longer-term effects of the reforms. Importantly, the reforms create an incentive structure for state governments to reduce losses at discos by requiring the state governments to assume a certain share of losses at these entities.
These changes align with the government's broad-based reform agenda, and should support investment and real GDP growth over the long term. Fitch has highlighted the implementation of structural reforms and boosting investment as an important credit factor for India, both to bolster growth and to reduce external vulnerabilities. We forecast Indian real GDP growth to come in at 7.5% this year and accelerate to 8.0% in 2016 and 2017.
The FDI and disco announcements highlight how the government can make reform progress using its regulatory and executive powers. However, other big reforms such as the implementation of a national value added tax, will require a two-thirds approval in the legislature and face stiffer political obstacles. The goods and service tax bill proposes a national GST to be implemented from April 2016. This is particularly significant for the economy - but more because it could contribute to diminishing inter-state trade barriers and creating a single internal Indian market, rather than strengthening the fiscal revenue base.
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