FDI on Retail ???

Hi Readers,

This is yet another much debated topic in India. After the government was able to pass the FDI on retail sector, almost all the retail stocks gained approx 40% as one of the retail mid-cap stock rallied on the day the bill was passed on both house of parliament.

However, when I sit back and think of this decision, many if and buts arise in my mind. The news of Walmart bribing, and Walmart itself being one of the major contributor in this sector, has made me think where Indian Industry would move. Walmart has gained bad reputation from the way they dealt in Mexico. Moreover, Walmart is the way in which Chinese goods can enter India easily and in much cheaper price compared to India's own production. This is certainly going to pose a good competition to India.

Only, money from FDI is not going to resolve issues in India. India need to resolve the issues inside the country, and not just make attempts to bring more money inflow. The difference between rich and poor is aggregating. India already needs to fight against corruption and control it, if again Walmart gets involved in malpractices in India, it is going to add to the standing problems.

All economist are bullish with government taking up reform majors. I am also hoping, the FDI in retail proves a boon and it actually makes India a better country economy wise.

Can the Government Break Gold Fever?

A gold duty hike is in the works, but it may not have enough of an effect on the current account deficit

Last week, the finance minister spoke out about the problem of gold imports. Some 12 per cent of India’s import bill is on account of gold. With the current account deficit of the country worsening, the government’s thoughts are tending towards the huge drain that gold imports are on the Forex reserves. The minister said that had gold imports been half of what they were, the Forex reserves would have been 10 billion dollars higher. He indicated that measures to make gold import costlier—presumably, higher import duty—were in the works.

There was a range of reactions to his statement, with some saying that this approach was right while others saying that it was wrong. Meanwhile, there were those who readied themselves for some market action on the expectation that if a duty hike looked imminent, then there would actually be a flood of demand, which would drive up prices as well as drive up imports! Perhaps the FM should not have shown his hand so early in the game—if he wants to hike duties he should just go ahead and do it. In fact, by this logic, the best way to depress imports could be to hike duties and then say that they will be brought down at some point. This would create the expectation of an imminent fall in prices. Unfortunately, this would be just a one-time trick.

As for whether such a duty hike is desirable or not, the issue is a complicated one. From my perspective, which is that of personal finance and investment rather than one worrying about the country’s current account, it would be great if Indians would move away from using gold as a means of savings. As a lot of people have been pointing out for long, gold is an unproductive asset. Unlike stocks or bonds, it’s a type of asset whose value depends on nothing but a shared belief that that value will rise and keep rising.

However, this apparently irrational gold boom has gone on long enough for it to shake the faith of a lot of people in the basic uselessness of gold. Buying gold is practically hardwired into the Indian investment psyche and it will take a lot to shift that. A higher import duty will certainly not be enough to do so. At best a higher duty would help the government’s other deficit, the fiscal one, by bringing in some more revenue. Provided, of course, the duty is not so high that imports will shift to smuggling.

Is there any possible way in which the government could reduce the appetite for gold? Perhaps it could, but only by executing a full throwback to the 70's. It would have to impose very high customs duties or perhaps ban the import of gold altogether. Then, it would have to focus a great deal of effort on combating the inevitable smuggling operations that would start flourishing. It would also be necessary to distinguish between gold that was legally owned before the ban from what was smuggled later. To do this, there would have to be some way of registering legal gold so that illegal gold can be chased down. Basically, this adds up to a reduction ad absurd argument against the government being able to do anything to curb gold imports and consumption.

One of the cultural curiosities of gold consumption in India is that in many types of usages, it is tied to a specific quantity of gold, rather than its value. The kind of family that would have bought 50 grams for a wedding a decade ago still aspires to the same quantity. While the government and economists are aghast at the increased value of gold imports, the increase in quantity is much less.

The only way a change will come is if there are other investment channels that become practical alternatives to gold. Even then, it will happen slowly and will only happen to a degree. Of course, its possible that such a change is already on its way. In all the alarm about gold imports’ impact on the current account deficit, the decline in gold imports is not getting enough attention. Going by the trend so far, this year, gold imports will probably be at least 30 to 35 per cent less than the previous year. This is actually a huge decline. I wouldn't bet on it yet, but a slow abating of gold fever may be on its way.