New Policy for Overseas Borrowings

Context

  • The Reserve Bank has come out with a new policy for overseas borrowings.
  • The RBI has rationalized the earlier policy in consultation with the Government of India.

Why this large decline in the share of this sector?

  • Under the New Policy,all entities eligible to receive Foreign Direct Investment (FDI) are permitted to raise ECBs up to USD 750 million or equivalent per financial year under automatic route subject to certain terms and conditions prescribed in the Guidelines, replacing the system of sector wise limits.
  • The Minimum Average Maturity Period (MAMP) has been kept at 3 years for all ECBs, irrespective of the amount of borrowing in lieu of various layers of MAMPs as under the earlier framework, except the borrowers specifically permitted in the circular to borrow for a shorter period.
  • The ECB Policy framework has been incrementally calibrated over time taking into account the emerging financing needs of Indian companies, especially critical requirements of infrastructure sector entities, macroeconomic developments and to promote ease of doing business; by permitting more resident entities as eligible borrowers, recognizing more entities as lenders, expanding end-uses and rationalizing the all-in-cost and minimum maturity requirements for such borrowings.
  • The recent changes that have been brought-out in the ECB policy are a part of this continued effort and are likely to help wider set of eligible borrowers i.e. corporates and other entities to avail ECBs to meet their capital needs with the Uniform Minimum Average Maturity Period requirements, uniform all-in-cost ceilings and small negative end-use list.
  • Earlier Tracks I and II of the ECB Policy Framework have been merged as “Foreign Currency Denominated ECB” and Track III and Rupee Denominated Bonds framework have been combined as “Rupee Denominated ECB” to replace the four-tiered structure.
  • As per the new ECB framework, the list of eligible borrowers has been expanded to include all entities eligible to receive FDI. Additionally, Port Trusts, Units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/cooperatives and non-government organisations can also borrow under this framework.
  • This Expanded List of eligible borrowers will enable a wider set of Indian companies to raise ECBs up to USD 750 million or equivalent per financial year under the automatic route replacing the earlier system of sector wise limits.

Key highlights measured by CSO

  • This wholesome development in employment was assumed by the CSO in making estimates till the subsequent main NSSO survey, in 2011/12, grew to become obtainable.
  • Nonetheless, the outcomes of the 2011/12 NSSO survey had been a shocker for employment beneficial properties.
  • For the interval 2004/5 to 2011/12, NSSO knowledge revealed a complete job achieve of solely 9 million (from 419 million to 428 million).
  • 9 million over seven years interprets right into a CAGR of solely 0.three per cent each year.
  • GDP development for this era: 8.1 per cent each year, implying a mean productiveness development of seven.Eight per cent.
  • Some acceleration in labour productiveness development was anticipated, given the massive enhance in funding — however 7.Eight per cent?
  • This was the primary broad trace that there was some overstatement within the GDP collection for the UPA interval.
  • • For WRT, the expansion in employment was even decrease than the combination — solely 0.2 per cent each year.
  • • The CSO (and worldwide advisers) rightly received all the way down to the duty of adjusting the strategy of estimating GDP for the WRT sector.
  • • They rightly converged on utilizing development in actual gross sales tax income as an indicator.

How much difference does the new and improved method make?

  • This huge decline within the share can solely imply that development within the WRT sector was considerably decrease than development within the non-WRT sector.
  • The brand new CSO again collection initiatives GDP development to be 6.6 per cent each year, FY05 to FY12, versus the 8.1 per cent contained within the previous GDP collection.
  • Inflation (as measured by the GDP deflator) between FY05 and FY12 has additionally been corrected.
  • The deflator is a weighted mixture of the WPI and CPI inflation indices.
  • The 2 elevated at a CAGR charge of 6.four and seven.9 per cent respectively between FY05 and FY12.

Way forward

  • Nonetheless, the previous GDP deflator has a mean inflation charge of solely 6.7 per cent.
  • A mid-point of the CPI and WPI inflation yields 7.2 per cent, that’s, GDP deflator was underestimated by round 50 bp within the previous collection.
  • These two easy computations recommend that any again collection sooner than 2011/12 ought to decrease GDP development.
  • The CSO estimate, incorporating all elements, is a really credible estimate.

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