UPA II: It’s time to act!

The rupee is sliding to all time new lows against the dollar, inflation figures seem to be getting out of control again, GDP forecasts are being lowered by all major institutions, and major scams are being unearthed in every now and then. Last 3 years of UPA II haven’t gone according to the script so to say. At every front the government seems to have failed. The 3^rd largest economy in Asia has not been doing its act. The government and finance minister would rather lay blame on external economic scenario (read Eurozone crisis) but all fault lies in the way it has run its own house; especially in handling its coalition partners. The economy stands at a precarious point and it’s time the government gets its act together by enacting reforms which are key to getting the country back on the path of high growth. ‘Policy paralysis’ in UPA II has cost us much more than just a rating downgrade by S&P.

5 key reforms that have been put on the back burner need to be enacted to ensure that we return to high growth rates. These reforms are:

FDI in retail

This is one reform that has caused UPA much headache. Although 100 FDI is allowed in cash and carry stores, the opposition and even key UPA allies have been against entry of global retail giants like Wal-Mart and Carrefour in multi-brand retail, via 49 per cent ownership. The government did try to push the reform but given the strong uproar against this reform it decided to pull back.

FDI in Insurance and Pension

There has been a case for increasing the cap in these sectors from 26 per cent to 49 per cent, however UPA has not been able to push these two financial bills. FDI in insurance will bring in much needed capital and best practices; while FDI in pension could diversify fund management.

Fuel Subsidies

Fuel price is a hot topic in India, a topic which is used by politicians often. While UPA II has made a move by deregulating petrol prices, it finds itself unable to do the same with Diesel, Kerosene and LPG. Fuel subsidies are a major burden on government finances. UPA II has committed in its budget that it will try to cap subsidies at 2% of GDP this year. This target would not be met if it continues to bear huge subsidy costs on these commodities.

New Tax Laws

Both the Goods and Services Tax (GST) and the Direct Tax Code (DTC) have gone past their implementation dates. The way state governments are opposing these laws, especially the GST; it seems that they will miss their deadlines again, unless UPA II is able to forge out some compromises.

FDI in Aviation

The state of the aviation industry surely makes this one a no-brainer. The mess that both government and private companies find themselves in can be solved to some extent by passing this key law. But again due to its political allies the UPA II finding it hard to push through this reform.

With major financial institutions lowering India’s GDP forecast for FY 2012-13 to below 7 per cent, I guess a strong enough message is being sent to the UPA II that this is the time to act to save the economy from slipping any further.

FDI: The final hope for India’s aviation industry?

Aviation minister Ajit Singh predicts Indian airline companies to post a loss of almost Rs. 10,000 crores in this fiscal. Kingfisher Airlines has huge outstanding with oil companies as well as airports to the tune of 280 crore rupees. Out of the six main companies five are making losses (Only Indigo is profitable). Rising fuel prices, high taxes and fierce competition have made a huge dent in their profitability. Amid all of this, the voice for FDI in aviation has been growing stronger. Coalition politics however, has delayed the decision so far. But the real question is how FDI will help a sector so deep in trouble. Is it just about access to more financial resources or is that the business model of the industry itself is flawed. FDI proposal was put on hold last month due to inter-ministerial conflicts as well as pressure from coalition partners. However there are some positive signs that 49% FDI in the sector may see the light of day soon.

Government haste to move in the FDI proposal may be due to the serious problems at Kingfisher airlines, which threaten the viability of the company. On the surface of it, it all seems to be so straightforwardly simple; FDI would mean capital influx into the struggling companies, which would help them tide over their problems, thus moving the whole industry towards a more profitable future. The company which seems would benefit the most out of an FDI is SpiceJet. SpiceJet has reportedly received offers from airlines in Gulf and South East Asia. Other airlines too may get offers; after all India is a market where the number of fliers has been increasing in double digits for the last few years. Given the potential of the industry, foreign carriers would surely be interested to enter in the domestic market.

Not everyone however is gung-ho about the impact of FDI. Some even feel that it may not do much for the industry and in the near term might even hurt the industry. Experts feel that capital inflow (say into Kingfisher) will lead to redeployment of Kingfishers idle fleet. Air India too is closing its turnaround plan, which will see it ordering more planes. All this will take us back to the same problem which has been plaguing the industry – ‘Overcapacity’. Overcapacity is one of the main reasons, besides fuel prices, which is responsible for the sorry state of the companies. There are just too much of seats in the air. The Indian aviation industry boomed too fast and companies invested too quickly leading to the problem of overcapacity. Extremely fierce pricing means the yields on generated per seat are very low. The thin margins of these companies are further eroded by high fuel costs and taxes.

The country has seen benefits of FDI in many sectors, like banking, automobile etc. FDI is not just about access to funds, in addition to capital influx, foreign carriers will also bring expertise in airline management and best practices to the Indian Industry. Given the way traffic is rising in India, especially in smaller cities, the need to invest in aviation infrastructure is only growing. The financial state of domestic carriers raises a concern whether they will be able to invest in the needs of the growing market. A little help from foreign carriers in the form of FDI will surely go a long way in ensuring that India’s aviation industry continues to grow by leaps and bounds. Hopefully, the government will understand that this move is the need of the hour and expedite its implementation.