Thought for the day
"Every truth has two sides; it is as well to look at both,
before we commit ourselves to either."
-
Aesop (Greek, 620-560BC)
Word for the day
Fallow (n)
Not in use; inactive:
(Source: Dictionary.com)
Malice towards none
Deeper and stronger the root of prejudice, least it is
spoken about!
Bear herd is watching ya!
As per a report published in the Financial
Times, in past few months the developing economies have suffered their biggest
capital outflows since the 2008-09 financial crisis.
Brazil is faced with recession, decade high inflation, a fiscal
crisis and water rationing. China is struggling to maintain 7% growth as
property prices are collapsing and financial system is reeling under severe
stress. The geo-political crisis in Russia at a time when energy prices are
collapsing is driving citizens to desert Ruble and switch their savings into US
dollars.
"Such snapshots of growing distress in the world’s largest
emerging markets are echoed among many of their smaller counterparts. Several
countries in Sub-Saharan Africa are beset by dwindling revenues and rising
debts. Even the turbo-powered petroeconomies of the Gulf, hit by a halving in
the price of oil over the past six months to $55 a barrel, are moving into a
slower lane.
Though these expressions of distress derive from disparate
sources, one big and insidious trend is working to forge a common destiny for
almost all emerging markets .
The gush of global capital that flowed into their economies in
the six years since the 2008-09 financial crisis is in most countries now
either slowing to a trickle or reversing course to find a safer home back in
developed economies."
India has been an exception to the trend, so far. The flow of
capital to the country has not only sustained in past couple of years, it has
actually accelerated in recent past 12 months. During FY15 the net foreign
flows into Indian assets exceeded US$44bn. Consequently, the Indian Rupee has
also materially outperformed its peers.
While it is worthwhile to examine the reasons behind the love
for India, still more important is to assess the consequences if the love is
lost, like in case of other emerging markets.
The divergence in foreign investor's India strategy vis a vis
general emerging market strategy became conspicuous in summer of 2013 when an
IMF economist Raghuram Rajan was appointed the governor of RBI.
The trend has strengthened since the new government assumed office
at center in May 2014. Prime Minister Narendra Modi's outreach to global
investors and appointment of couple of more prominent market economists to
important posts has helped in boosting the confidence. Improvement in
macroeconomic data driven by lower energy prices, fiscal tightening, and benign
inflation expectations has further cemented the trend.
However, if we consider that most of the improvement in
macroeconomic factors may have occurred due to circumstantial factors like
cyclical trough in global demand leading to lower commodity prices; lower
domestic consumption demand due to a variety of factors like lower social
sector spending, poor employment level, decline in real wages, leading to
benign inflation expectations, poor investment demand supporting comfortable
liquidity and lower rate environment, etc.
The recent comments
of RBI governor - implying that the infrastructure development model adopted
by India during past decade may be faulty inasmuch as it pushed infrastructure
building at the expense of financial stability - suggest that the fresh
investment cycle may not start in a hurry. Not at least till the alternate
source and model of infra development funding are firmly put in place. More on
this in later pages.
There are little structural changes to show that Indian economy
will escape the deflationary contagion should one engulf the global markets.
Bear herd must be watching keenly
I am sure the herd of bears that has been suffering for past
couple of years, must be watching Indian markets keenly. They should pounce as
soon as they smell the blood.
With little margin for error in monetary and fiscal policies,
the Indian markets are more vulnerable to a bear attack then ever in past five
years.
Continued poor show by corporate earnings, elevated level of
stress in financial system, rise in consumer inflation beyond RBI's comfort
zone on the back of crop
damage due to recent unseasonal rains and a poor monsoon
due to El Nino conditions developing in Pacific Ocean could be a setback to the
investor's sentiments.
However, the most irksome sentiment dampener could come from
rise in number of tax
litigation with foreign tax payers.
A poor performance by BJP in Bihar elections, not unlikely,
could queer the political pitch for Modi led NDA government.
Conspiracy theory
The most popular conspiracy theory doing rounds is that the
foreign money flowing into India is nothing but domestic black money making a
round trip. Even if this is the case, the mount may not be infinite.
5/95 model may not be a way to go forward
The Reserve Bank of India (RBI) chief said on Thursday the
country's push to build infrastructure should not come at the expense of
financial stability, adding banks already had too much exposure to the sector.
Instead, Governor Raghuram Rajan said, India needed to find new
sources of funding for infrastructure so that debt levels remained
"moderate".
The comments, at a financial event organised by the RBI that was
attended by Prime Minister Narendra Modi, come as the government says it wants
$1 trillion invested in infrastructure in the five years to 2017, with half of
the funding coming from private companies.
"The nation has enormous financing needs in infrastructure,
and far too many of our banks already have too much exposure," Rajan said.
"Big corporate infrastructure players have also taken too
much debt. The required national push to finance infrastructure should not
override financial stability, which is key to national security."
Funding for infrastructure is expected to pose a challenge to
India, whose banks, especially state-owned lenders, continue to struggle with
non-performing loans.
The gross bad loans ratio at banks could rise as high as 5.7
percent by March 2016 from 4.5 percent last December, rating agency ICRA
estimates. (Reuters)
This statement in my view, casts a shadow on the most popular
model of infra development in India. The projects are often undertaken with 5:95
equity to debt ratio. It is popularly believed that some promoters even avoid
putting 5% equity using scrupulous methods. In case project is successful, they
make lot of money. However, if the project fails, the loss is absorbed by the
lenders (mostly public sector banks) and tax payers.
The undercapitalized infra developers that have mushroomed in
every nook and corner of the country would have no reason to exist if the
intent is followed with honesty.
Another set of companies that should face extinction are the
contractors who have been successful in obtaining construction contracts due to
the political and administrative patronage enjoyed by them. Given that to keep
his image and Kurta clean, PM Modi would want e-tendering to be introduced for
most government and semi-government (PPP) contracts.
Another question on the sidelines would be "whether PSU
banks are good investment sans patronized portfolio?"
I would like a study to be conducted for examining what was the
growth rate for PSU banks in past decade if we take out (a) Discounting of oil
bonds for OMCs, (b) financing to power sector against coal mines, (c) financing
to Telcos against spectrum and (d) financing real estate developers under the
garb of schemes such as 20/80 and (e) farm sector loans which the banks did
want to give at the place.
Make in India - Is this the way to go forward
Last week the Union Cabinet approved revival of two shut urea
plants in Uttar Pradesh and Bihar at an investment of up to Rs. 12,000
crore.
Currently India imports ~25% of its urea requirement. In last
decade no new investment has been made in the sector in India. The reason is
that urea production in the country is highly uncompetitive in global
perspective. Currently, the landed cost of imported urea is US$30/tonne cheaper
as compared to locally produced urea.
A similar situation exists in edible oil and a host of other
sectors. If the things remain the same as they are, we might see a similar
condition emerging in sugar sector also.
The points I am trying to make here are:
(a) Whether it is
good economics and/or politics to produce locally if you could import at much
cheaper price.
(b) Whether Make in
India model is financially viable without dealing with the political model
which focuses on short term expediency at the expense of long term
sustainability.
Blood diamond
The prime minister claims that his government has turned coal mines
into diamonds for the exchequer.
It is worthwhile to ask the following questions from his
government:
(a) Whether the
government of the day had any other option but to go for transparent auctioning
of natural resources after the Supreme Court decided on cancellation of
spectrum and coal block allotments.
(b) The Rs2,00,000
crore will accrue to the government over next 30yrs. The present value (NPV) of
this money is much smaller.
(c) Does the
government has any viable plan to ensure that Coal India Limited does not go
the MTNL, BSNL and Air India way post privatization of coal production for
commercial sale.
In my view it does not have and CIL may be a much weaker company
in two decades from now.
Trivia
The whole financial sector seems to praying for poor US economic
data. It seems that a very poor data could only delay the "lift" (new
jargon for rate hike).
I do not know what to wish.
I believe a stronger US economy could only save the world from
slithering into a deflationary vicious cycle.
The reversal of US carry trade closer to "lift" may
crush the spirits of market bulls for a month or so.
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