Indian reforms to yield modest gains
If India’s policymakers are hoping their loosening of onshore and offshore borrowing restrictions will help furnish their waning reform credentials, they should expect to be disappointed. The reforms are welcome but a bit like firing a spud gun when a Daisy cutter is needed.
If anything, they highlight the conservatism the blights India’s approach to capital market regulation.
Indian corporates are shackled by high funding costs and a myriad of regulations that deny them access to many cheaper funding options. These latest reforms will help far too few issuers – and mainly issuers with foreign links at that – to have a truly meaningful impact.
Worst of all, these changes re-enforce the discriminatory nature of India’s regulatory regime in which different sectors have access to different funding options because of Byzantine regulations.
Take the move to allow companies to have offshore entities guarantee their bonds, something that only infrastructure and infrastructure finance companies are presently allowed to do. That’s great for Indian subsidiaries of foreign companies in sectors like telecoms and energy because it will enable them to benefit from their parents’ superior rating and thus borrow more cheaply.
But it will be of far less use to most rupee bond issuers – home-grown companies, with no foreign parent to help them, that operate in sectors that don’t attract the support of multilateral finance institutions.
The reduction from seven years to three years of the minimum maturity for rupee bonds that local units issue is likewise a positive step in giving companies greater financing flexibility but, again, does not go far enough.
Equally disappointing was that while foreign investors will be allowed to invest up to US$5bn in these offshore-guaranteed bonds, the overall corporate-bond limit has been left at US$45bn. The scrapping of this cap, or at the very least the raising of it, more than any other reform, would add liquidity to rupee bond market and help lower borrowing costs.
Likewise, increasing the amount that infrastructure and manufacturing companies are allowed to borrow via offshore loans to up to 75% of their average foreign exchange earnings over the previous three years, up from 50% previously, is just tinkering. Borrowing offshore is cheaper than borrowing in rupees, but this change will benefit only a couple of sectors. And, in any case, companies still need to get approval from the Reserve Bank of India for offshore borrowings of a paltry US$20m or more and if the average maturity is less than five years.
Faced with a slowing economy, India’s government is desperate to show it has not lost the reformist zeal that set the country of the road to prosperity. These reforms are a step in the right direction, but because they are modest reforms, they will yield modest results. Let us hope this is just a taste of things to come.