Monday, October 2, 2023

G7 sanctions hit India, FDI flows sink, dividends blocked

Shivaji Sarkar

India is growing. Figures may vary but by sheer number of people, efforts, enterprises and production, it has to grow. Prime Minister Narendra Modi tells the meet at Australia that global expectations from the country are rising. Certainly, but the country faces problems too as the recent G7 meet at Hiroshima tightens sanctions against Russia that prevents even imports and wide range of exports.
It blacklists 69 Russian companies and one each from Armenia and Kyrgyzystan. It is hitting India too. It has come with the first decline in a decade of 16 percent foreign direct investment (FDI) inflows to $ 71 billion. The RBI notes that after adjusting for repatriation and disinvestment direct inflows are at $ 41.6 billion, 27 percent lower. Yes, there is global slowdown but sanctions too may be preventing deals.
The world economy is in a tizzy since 2007-08 subprime crisis, when a number of global giant banks, insurance companies and financial institutions collapsed. It did not bring down FDI. Never before it hit India so hard. Sure the Prime Minister knows how to “challenge the challenges”, including this one. The sanctions may be dampener. The G7 was not soft towards India at the latest meet.
The country needs to introspect. The recent unsavoury happenings in Manipur may appear to be a non-event at a remote corner. The international system observes it keenly. It understands that it is not all hunky dory. At its investment meet three months back, UP got a mere Rs 33000 crore promises and no FDI. Many jerky decisions were taken during the past few years.
At a time when the economy was turning for the better, it got the shock of demonetisation, considered an expression of distrust in one’s currency. Next was a not so well-tailored GST, which gave goose bumps to the economy. Higher its collections are, deeper it led to problems with unmanageable inflation. It has subsided a bit but the compounded effect of high retail and wholesale indices have pitched the price bases at high level. It has made manufacturing and processing expensive contributing to fall in exports.
India has been making strides in turning the rupee into an international currency. Again the confidence of those who deal with India gets a jolt as Rs 2000 currency notes are demonetised. It has a cost. The process itself costs a minimum of Rs 1 lakh crore. Collection, accounting, disposition too have costs. Scrapping 10.8 percent currency, at a time when India wants to increase trading in rupee, is not desirable. Caution in dealing with the currency perks up its brand value. Russia despite a rupee trade agreement has refused to accept rupee payment.
The US dollar reigns supreme despite the shaky conditions. The US Federal Bank scraps series of notes periodically.
It, however, never withdraws and allows the notes to continue till these are in circulation. A wise move. A fledgling poor economy needs more caution. Particularly as it strives to be a global leader and a comparable economy. The cautions are appropriate as the global economy is through a severe problem for low demand, production and related reasons. The Ukraine war is draining European and US resources heavily. It is hitting Russia and Ukraine as well. The US sanctions have brought many bits to thaw. Indian private oil companies may feel happy for buying oil cheap from Russia and selling refined diesel and petrol to the West at premium.
It is hitting the PSU oil companies, ONGC Videsh Ltd (OVL), Bharat Petro Resources Ltd, Indian Oil Corp. (IOC) and Oil India Ltd (OIL) hard. They are the least beneficiary of the cheap oil purchase. Now they have their $ 400 million dividends locked up as Russian banks are cut off from SWIFT payment system.
Japan in tune with G7 freezes the assets of 78 groups and 17 individuals and bans exports to 80 Russian entities. Though India is not the target, many of it could hit India.
India has invested $ 16 billion in Russian oil and gas projects. The OVL holds a 26 percent stake in CSJC Vankorneft’. An Indian consortium comprising Indian Oil, OIL and Bharat Petro Resources also holds a 23.9 percent stake in the same venture, with Rosneft’s affiliate RN Vankor operating the field with a 50.1 percent stake. In addition, a consortium of Indian Oil Corp., OIL, and Bharat Petro Resources holds a 29.9 percent stake in LLC Taas-Yuryakh. OVL also owns 20 percent of Sakhalin-1 and acquired Imperial Energy Corp. which has 10 production blocks in western Siberia.
With India dependent on imports for as much as 85 percent of its oil needs and 55 percent of its natural gas demand, record-high energy prices are a big concern.
It may be having impact on the FDI as well. The latest sanctions targets individuals and 20 countries. Whether inflows subsided for that reason is not clear but through 2022 declining trend was visible.
It was ascribed to the weak economic conditions and drying up of funds because of high prices. Even during the covid19 FDI flow to many tech companies including the Reliance groups surge was noticed. Crisil economist DK Joshi says that India is in a comfortable position and can attract investment.
However, Unctad’s World Investment Report warned of investor uncertainty and risk aversity triggering significant downward pressure on global FDI. It did not specify what the risk aversion is but it is being interpreted as US and G7 move of sanctions against Russia. An interesting aspect is that even Indian companies too went slow investing in foreign shores. It fell to $ 13.6 billion, 23.6 percent fall. It could be either due to poor financial conditions or also because of the fear of sanctions for India’s with Russia.
India was the largest destination for the FDI in setting up of R&D bases by multinationals. The government hopes that it is temporary phase and would be corrected soon. But the way the post Hiroshima G7 meet sanctions on Russia have been tightened, it may not possibly be easy.
The Boeing had planned investing in aircraft maintenance operations in India. It is however lukewarm to the recent call of Finance Minister Nirmala Sitharaman.
India may look for large investments but if G7 remains tight-fisted the future flows may remain uncertain.


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