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Additional Steps to Provide Further Impetus to Indian Economy

"Structures" refers to financial vehicles that provide and improve capital access to businesses

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Indian, Economy, Microstructure
Mainly, further accelerating capital flow must be the prime objective. Pixabay

As the focus continues to be on additional steps to provide further impetus to the Indian economy, the microstructure of the financial markets assumes significance. From a financial market perspective, the focus must now be on “structures, security design, and market access”. Mainly, further accelerating capital flow must be the prime objective.

“Structures” refers to financial vehicles that provide and improve capital access to businesses. Real Estate Investment Trusts (REITs) and Asset Reconstruction Companies (ARCs) are very significant moves. Now is the time to expand the theme of aggregation vehicles across the spectrum to a wide variety of assets such as natural gas pipelines, transmission assets, large-scale container businesses etc. REITs and ARCs at a fundamental level, allow the operator and creator of assets to access capital providers. When successful, both sides benefit immensely: operators through access to low cost and ample funding while the investors get access to assets through which to earn returns. India should now look at structures like REITs across capital expenditure heavy sectors. There is virtual unanimity on the scale of investment that India requires. Hence, structures that can facilitate the flow of capital by clear demarcation between the roles of the various stakeholders is much needed.

However, for structures to succeed in the long-run, the government must be cognizant of “security design” needs. “Security-design” refers to the financial instruments that allow capital to be invested in investment opportunities. The one key lesson from the credit issues that have plagued the credit sector in India is that standard financial securities such as bonds, loans and equities haven’t been able to create the transparency required for effective implementation of projects and corporate governance standards.

Indian regulators, investors and project developers need to seriously think about creating standardised new securities that can align the incentives of the various parties involved, especially with a view towards immense clarity regarding the cash flow profiles at both corporate and project levels. For India to generate the next phase of growth, “transparency of cash flows” will be a vital component, if not the most important one.

Indian, Economy, Microstructure
From a financial market perspective, the focus must now be on “structures, security design, and market access”. Pixabay

Therefore, when designing the standardised structures under reference or vehicles of investments, significant attention is needed towards creating the “securities” that will allow ownership of the “structures”. The non-alignment of the incentives of the equity and debt holders, especially with a view on the cash flow profiles has been one of the most significant factors of an exacerbated credit issue within the Indian credit spectrum.

Additionally, beyond structures and security design, market access needs to be improved for Indian investments. Improving market access involves broadly two components: Greater global participation in Indian markets and market makers to warehouse risk and provide liquidity. Both parts go hand in hand towards creating markets with great depth and liquidity, thereby providing the much-needed price discovery.

The recent talk about including Indian bonds in global benchmark indices is what will precisely lead to greater market access. Inclusion of Indian sovereign debt in global benchmark indices will imply considerably more capital in Indian bonds, thereby generating liquidity and hence allowing greater participation by both investors and market makers. Higher liquidity in sovereign debt curve across the term structure entails a deep and liquid benchmark curve of which to price corporate credit.

As mentioned above, the liquidity provision will require more participation of market makers in India to warehouse risk and provide liquidity. More significant liquidity provision isn’t limited to just bond trading desks but includes any asset that might utilise structures mentioned above. Such market-making businesses will provide market liquidity and, most importantly, price transparency. But, for such market-making enterprises to be successful, stable policy regimes will be a must.

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A quick look at the sectors much affected by credit constraints such as real estate, or thermal power indicates that the problems emanate from two core issues, namely, of corporate governance and most critically over-investment due to a lack of price discovery. A market that can signal low returns within a short time or indicate over-investment in certain areas will assist follow-on investors, both in the equity and credit space, make much more informed decisions.

Effective “structures, security design and market access” will allow the ecosystem in India to signal any impending issues. Essentially, reducing the time lag between sectors getting overheated or unattractive and investors gauging the same is dependent in no small extent on frameworks that allow expedited information delivery. As we move forward, robust structures that generate information with alacrity are the need of the hour. (IANS)

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Here’s Why Coronavirus May Have Severe Impact on Asia’s Economy

This time around Chinese tourism matters even more to Southeast Asia

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Coronavirus
The Coronavirus outbreak, which has so far caused 41 deaths in China, and caused the country to quarantine 16 cities, is causing comparisons to the 2003 spread of severe acute respiratory syndrome, or SARS, which decreased the value of the global economy by $40 billion. VOA

Southeast Asia’s proximity to China and dependence on that nation for a major share of its economy is raising concerns that the coronavirus outbreak  that started there will not only have health impacts but harm the region’s economies.

The outbreak, which has so far caused 41 deaths in China, and caused the country to quarantine 16 cities, is causing comparisons to the 2003 spread of severe acute respiratory syndrome, or SARS, which decreased the value of the global economy by $40 billion.

“Now that the Wuhan coronavirus has been found to be able to be transmitted from human to human, the economic consequences could be extremely concerning for the Asia-Pacific region,” Rajiv Biswas, IHS Markit Asia Pacific chief economist, said.

Sectors of the economy that are particularly vulnerable to a SARS-like virus epidemic that can be spread by human-to-human transmission are retail stores, restaurants, conferences, sporting events, tourism and commercial aviation,” he said.

Observers agree that tourism could be one of the hardest-hit industries, in part because of the millions of Chinese who usually travel now, during the Lunar New Year, and in part because China has grown so much in the last two decades that many neighboring nations depend on it for tourism.

That is only one of the economic differences between China today and the China of the SARS virus in 2003.

Coronavirus
The recent coronavirus outbreak originating from China to other countries including Singapore may impart some uncertainty to near-term business and consumer sentiments. VOA

China has since then become a member of the World Trade Organization and the second-biggest economy in the world. Its supply chain has become more integrated with the rest of the world than it has ever been, and it has become the biggest trading partner for many countries in the region.

The 2003 virus decreased China’s economic growth rate, but its effect was the same for Malaysia, Singapore, and Vietnam, Biswas said.

This time around Chinese tourism matters even more to Southeast Asia.

After Hong Kong, nations for which Chinese visitors’ spending accounts for the biggest share of gross domestic product are, from most to least, Cambodia, Thailand, Singapore, Vietnam, and Malaysia, according to statistics released by Capital Economics, a London-based research company, Friday. In many of these nations, businesses catering to tourists display signs in Chinese, accept China’s yuan currency, and use that country’s WeChat for mobile payments.

Major tourism events in the region add to the threat that the virus and its economic impact will spread, such as the Tokyo Summer Olympics, Biswas said. Vietnam will also host the Vietnam Grand Prix Formula One race this year, while Malaysia will host the Asia-Pacific Economic Cooperation forum.

Singapore is an island nation that depends heavily on foreign trade, including to facilitate trade and investment in China. Selena Ling, head of treasury research and strategy at Singapore’s OCBC Bank, said Friday she was expecting Singapore’s economy to stage a modest recovery from 2019, but that may change.

Coronavirus
Southeast Asia’s proximity to China and dependence on that nation for a major share of its economy is raising concerns that the coronavirus outbreak  that started there will not only have health impacts but harm the region’s economies. VOA

She said “the recent coronavirus outbreak originating from China to other countries including Singapore may impart some uncertainty to near-term business and consumer sentiments.”

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That could mean slower growth in the first quarter of 2020, she said. (VOA)