Vijay Kumar Gaba: Rate Cut

Showing posts with label Rate Cut. Show all posts

Tuesday, March 24, 2020

Some random thoughts

Making IBC little more pragmatic

Last week while on a visit to Mumbai, I noticed few aircrafts belonging to the now defunct Jet Airways parked on the airport. The aircrafts had gathered lot of dust and pigeon crap. I believe it's more than a year since these aircrafts must have been parked there. The owner/lessee of these aircraft owes billions of rupees to various lenders and operational creditors. The company is undergoing the bankruptcy proceedings and apparently so far no buyer has shown any interest in acquiring the company.

I wonder, why the bankruptcy procedure be made little pragmatic! I feel one of the key purposes of the bankruptcy process must be to minimize the losses to the lenders and operational creditors. If these aircrafts that are lying idle were leased to other airlines till the completion of IBC process, at least some money could have been recovered. Or at least, Jet Airways could have been saved from incurring parking charges (which it can never pay), and machines could have been saved from major overhaul cost due to lying idle (again that cannot be paid by the Jet Airways).

A bureaucrat obviously will never take any initiative in this direction, as it would increase his workload and responsibility. The politicians who travel everyday and see these aircrafts rusting and gathering dust could only take an initiative, as it may require some legislative changes also.

Government may have done a lot by not doing anything

Talking with a senior bureaucrat last week I realized the importance of sophistry in running the government. To my inquisition about the below par performance of the Make in India program, his answer was the best example of sophistry.

He said, "the government went slow on Make in India program. We were never comfortable about creating large capacities using borrowed money to increase our integration to the global supply chain in these uncertain times. Our strategy of going slow has bore brilliant fruits. Imagine, if we integrated into global supply chain like China, and all those factories were shut down due to global demand collapse. All of these would have defaulted on their loans, totally crushing our financial system."

After the God explaining that "sometime inaction is the most appropriate action", this is perhaps the best explanation I have heard.

Clamor for rate cut may be misplaced

A lot of market experts have expressed their anguish over RBI not making an "emergency rate cut". Unfortunately, they are seeking rate cut to comfort the financial markets and not the economy. Their complaint is that stock markets are sliding fast and RBI is doing nothing to stop the slide, even though it has many bullets preserved in its barrel.

These experts appear totally oblivious to the fact that dramatic cuts by some large central banks have done almost nothing to arrest the market slide.

Even, from the real economy view market, a rate cut now would have yielded miniscule results. The capacity utilization levels are running persistently low and demand for new investment is low; the banks and NBFCs are mostly risk averse and not willing to lend; the system is liquidity surplus; RBI is providing 3yr funds at 5.15% and buying bonds to ease the pressure on longer maturities. A rate cut now may only disturb the equilibrium in currency market. I would rather like RBI to cut substantially when things stabilize a bit and banks are willing to take risk. For now, the rate cut would comfort stock markets for 2hours or may be less than that.

Tuesday, November 5, 2019

Keep the wheels of economy in motion

In one of his recent interview, Brian Coulton, the Chief Economist at Fitch Ratings, emphasized that the persisting credit squeeze in the Indian economy may hurt the economic growth much more than the present estimates. Brian cautioned that the GDP growth in FY20 could slip to 5.5%, much below the current RBI and government estimates of 6%+ growth.

For records, the Indian economy grew at the rate of 5% in the first quarter (April to June 2019) of the current fiscal year, the slowest in more than 6 years. The slowdown was visible in all sectors of the economy including agriculture, manufacturing and services. Within services, the growth in finance, insurance and real estate sectors was cited as particularly worrisome, as it highlighted poor credit conditions.

Besides, the credit availability, the high cost of credit is cited as one of the constricted factors. Despite 135bps cut in policy rates in the year 2019, the real rates are found to be still elevated, constraining the growth.

The GST collections for the month of September have reported at Rs 95,380cr a year-on-year decline of 5 percent and 3 percent lower than the monthly average of Rs 98,114 crore for FY19. The GST collections in FY20 have been consistently below the budget estimates. Juxtaposed to the shortfall in income tax collection, it does not augur well for the fiscal balance. The scope for the fiscal stimulus as widely anticipated by the market participants appears very limited. In fact, the government may actually be forced to increase the effective taxation for the affluent section of the society in the forthcoming budget.

Reportedly, housing sales declined 9.5 percent during July-September period across nine major cities to 52,855 units on low demand as economic slowdown and liquidity crisis weighed on buyer sentiment. As per the PropEquity data quoted by Bloomberg, Chennai saw the maximum fall of 25 percent in housing sales at 3,060 units during July-September 2019 as against 4,080 units in the year-ago period. Housing sales dropped 22 per cent in Mumbai to 5,063 units from 6,491 units, followed by Hyderabad that saw 16 per cent decline to 4,257 units from 5,067 units.

Notwithstanding some encouraging sound bites from the corporate leaders this Diwali, the recently released data on core sector growth belies the optimism. The growth in India’s core sector output contracted 5.2% in September 2019, its worst performance since 2005. All sectors in the core index, with the exception of fertilisers, posted a contraction. The data indicates the economy may have slipped further in the 2QFY20, confirming the fear of rating agencies and economists. As per some estimates the GDP growth rate for 2QFY20 could be closer to 4% rather than 6% as widely anticipated.

Two short points I would like to make here are as follows:

The growth slowdown is real, persistent and widespread. A part of this is certainly cyclical, but treating the entire thing as such may be misleading. The structural part of the downward shift in growth curve needs to be acknowledged, identified and treated separately.
The adhoc stimulus must be directed at boosting both consumption as well as investment demand. The measures like corporate tax rate restructuring, and ease of doing business shall have impact only in due course; and for these measure to have any impact the wheels of the economy must be kept in motion.

Friday, October 4, 2019

Thursday, October 3, 2019

Sentiment watch

Last weekend I had an opportunity to address a gathering of stock market intermediaries. The interface provided some useful insights which I find pertinent to share with the readers.

All the participants deal with small and medium sized household investors and traders, commonly referred to as the Retail Investors. The common refrain was that the recent stock market rally has not benefitted the retail investors. Most of these investors are stuck with the struggling mid and small cap momentum stocks which are down anywhere between 25%-75% from their cost of acquisition and no hope of recovery.

To make the matter worst, many of their active clients are still looking to buy the fallen angels, the stocks where the equity value is negligible or even negative in some cases. Most popular stocks with this segment are stock of JPA group, ADAG Group, Jet Air, DHFL etc.

Tata Motors, SAIL, Nalco, Coal India and Yes Bank are some of the stocks which have perhaps disappointed the largest number of retail investors.

The investors' sentiment has improved marginally post the restructuring of corporate tax rates announced by the government. However, most of them remain skeptic about the sustainability of the current up move. There appears to be a widespread expectation that the budget for FY21 will contain provisions for restructuring of the personal income tax rates also.

The feedback about the business sentiments was scanty. Nonetheless, there appears to be some improvement in business sentiments. Most of the people would however like to wait for supplementary announcements like rate cuts, easier credit terms and government spending etc.

The two key concerns of the participants were:

1. Will the promoter be encouraged by new tax provisions and set up new units as private entities, rather than investing in the growth of the existing listed entities?

2. How the government will manage the fiscal deficit post the rate cuts, especially when the GST shortfall is also going to be much higher than anticipated? Will higher deficit constrain RBI in cutting the rates further? and Will the government investment in infrastructure be pushed back by couple of years due to revenue shortfall?

My take on these concerns is as follows:

Fresh capex

In my view, the first concern may not be valid for the businesses owned by Indian promoters and/or investors. For, many of the Indian businesses (e.g., in cement, power, chemicaal, steel, auto sectors) have either done material capex in recent past or are running at poor capacity utilization and do not need to do invest in fresh capacity in near term.

Insofar as the foreign companies are concerned, many of them like Maruti, Bosch, Siemens, Cummins, and Schneider etc have been investing outside the listed entity for past many years. This trend may continue or even accelerate. The consumer MNCs like Colgate, HUL etc do not need to do much capex in near future at least.

Fiscal deficit

The relationship between the investors and the fiscal deficit is akin to the proverbial Mother in Law and Daughter in Law relationship. No matter what, the investors can never be fully satisfied with the fiscal conditions.

We have seen much worse fiscal conditions in past 3 decades. The point that is often ignored in comparison with global economies is that so far the fiscal deficit in India is still funded by the savers, mostly from middle and lower middle class. In fact, in past 4years the reliance in small savings to fund the fiscal deficit has risen considerably.

Historically, the governments have been managing the fiscal burden through maintaining the interest rates on savings in negative territory (deposit rates being equal to or lower than consumer inflation). In recent times the real rates have become hugely positive and there is lot of leverage there to cut rates and fund the fiscal deficit easily with no critical impact on the overall fiscal conditions.

Moreover, we are likely to see an aggressive disinvestment program in next 12-18months that shall compensate for some of the revenue shortfall. 5G auction in FY21 should also be supportive. However, if the rates are not cut meaningfully (or inflation does not rise meaningfully) in next couple of years, FY22 onwards we may see pressure on the fiscal conditions.

The key monitorable here is the private savings rate that has been declining consistently in past one decade despite very high real rates in recent years. If tax cuts can result in higher corporate savings, it would be good sign for the economy.

Remember the gamble the government has taken is that private investment will accelerate to compensate for the poor growth in public investment. If this bet fails in next 2-3years, we shall have a serious problem at our hand.