Friday, November 23, 2018

AUG 18 ECO Indian rupee Concession Financing Scheme

FA LLI NG R UPE E

Why in news?

Recently, the Indian rupee weakened past the 71 mark for the first time ever.

More on news

The rupee has registered a loss of about 10% of its value against the dollar since the beginning of the year making it the worst-performing currency in Asia.
Other emerging market currencies, most notably the Turkish lira, the Argentine peso and the South African rand, have suffered much larger losses owing to a serious loss of confidence among investors.

Reasons of falling rupee

•   Increasing demand for the dollar across the globe: The tightening of liquidity in the West, with the U.S.
Federal Reserve raising interest rates, has played a major role in the strengthening of the dollar since February
this year. Investors who earlier put their money in emerging markets have recently preferred American assets, which now yield higher returns.
Higher domestic inflation in emerging economies when compared to the West : Thus, it is natural for these currencies to slide in value over time against the dollar and other major Western currencies.
Trade war between China and America, leading to import restrictions with high tariffs is causing dollar to appreciate. Huge dollar purchases by oil importing companies have also weighed heavily on rupee.
Oil prices:  Iran  sanctions  have  been  driving  oil  prices  higher  despite  OPEC  move  to  raise  output.  The benchmark Brent crude surpassed the significant $75-mark a barrel. This is bad for India as it is third largest importer of oil, hence current account deficit has been coming under pressure.
•   More imports than exports: India’s import bill has been significantly rising without increase in net exports.
India’s current account deficit is rising and is expected to go up to 2.5-3% of the gross domestic product (GDP)
in the current financial year. Differently put, India is importing a lot more than it is exporting. Higher CAD in
an environment of tightening financial conditions may continue to put pressure on the rupee

Impact of falling rupee

•   On imports: the country’s imports become more expensive as it takes more rupees to pay for the same
quantum of imports.
On competitiveness:  As fewer dollars are required for a buyer to pay for the same quantity of exports, India may gain its competitiveness which has been gravely hurt by an exchange rate policy that has prioritised a muscular rupee. It would also promote Make in India.
On inflation: More expensive imports are likely to drive inflation upward, especially in India where input products constitute a large part of our imports.  It also impacts the oil import bill which plays its own part in pushing inflation up. Rise in inflation would hurt investors sentiment as well.
On GDP growth: On the one hand, costlier inputs and the subsequent increase in the prices of finished goods may have a positive impact on GDP while on the other hand, consequent decrease in demand due to higher prices could nullify this.
Widening of deficits: As per analysts, every $10 per barrel increase in oil prices could worsen current account and fiscal balances by 0.4% and 0.1% of GDP respectively.
On tourism:  trips abroad turning more expensive. On the flip side, the domestic tourism could grow as more tourists visit India since their currency now buys more here.
On employment:  In the medium term, export-oriented industries like Pharma sector, IT, gems and jewellery etc. may also create more jobs.

Steps that can be taken by government

•   Long term solution
o Reduce heavy dependence on imports as well as on oil.


20                                                                                                                                                                 ©Vision IAS
o Boost export industries by measures such as ensuring that exporters have easier access to tax refunds; a war-footing attack on red tape at the borders; and a clear commitment to opening up to new market- enhancing trade deals.
o Attract FDI instead of FII, through simplification of procedures, laws and dispute redressal. The rules for foreign borrowing should be liberalised by Indian firms to ensure higher inflows.
o Maintain limit on deficit: Although India’s fiscal position has improved in recent years, compared to peers, the combined deficit is still on the higher side. The government should not allow the deficit to slip at this stage as it will increase macroeconomic stability risks.
•   Short term solution
o Increase in interest rates by central bank to control money outflow. However, cost of borrowing increases due to this which may cause fall in investment in the country.
o Using foreign reserves to reduce volatility: As of June 22, the RBI had foreign exchange reserves of
$407.81 billion, which it can sell in the open market. It is important to note, though, that reserves are only
useful in reducing volatility and are not an antidote for poor economic management. If financial markets
start believing that the country has problems at the fundamental level, then defending the currency can
become extremely difficult.

3.2. CONCE SSI ON FI NA NCI NG SC HE ME

Why in News?

Recently,  government  extended  the  Concessional  Financing
Scheme (CFS) for five years till 2023.

About Concession Financing Scheme

The scheme is aim to support Indian entities bidding  for strategically important infrastructure projects abroad.
Under the scheme government provide counter guarantee and  interest  equalization  of  2  %  to  EXIM  Bank  to  offer


Related Information
LIBOR
LIBOR or ICE LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans.
It  stands  for  Intercontinental  Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world.
concessional finance to any foreign Govt. or controlled entity, if any Indian entity, succeeds in getting contract for the execution of a project.
It will now cover all Indian entities, compared to the earlier stipulation of minimum 75 per cent Indian shareholding.
EXIM Bank extends credit at a rate not exceeding LIBOR (avg. of six months) + 100 bps. The repayment of the loan is guaranteed by the foreign govt.
Under the scheme Ministry of External Affairs selects the project, keeping in view strategic interest of India and sends the same to the Department of Economic affairs.

Significance of the scheme

It will help in generate substantial backward linkage induced jobs, demand for material and machinery in India and also a lot of goodwill for India.
Bidding large Project: Prior to the introduction of CFS, Indian entities were not able to bid for large projects abroad since the cost of financing was very high for them and bidders from other countries such as China, Japan, Europe and US.

No comments:

Post a Comment