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Thursday, December 19, 2019
Wednesday, December 18, 2019
2019 - In retrospect
As an investor, I would describe the 2019th year of Christ as
"befuddling".
The domestic economy worsened materially despite better global
opportunities, improved infrastructure and supportive policy environment. The
private consumption and investment were the worst affected areas of the
economy, despite introduction of an elementary Universal Basic Income (UBI)
program for farmers, best monsoon in decades, 135bps fall in policy rates
(which have been mostly transmitted), and persistently low inflation for most
part of the year.
For most of the financial investors, the year 2019 was
disappointing in terms of return on portfolios, even though the benchmark
equity indices are ruling at all time high levels, foreign flows have been best
in 5years, and benchmark bond yields are lower by almost 100bps.
Domestic economy worsens
The year 2019 witnessed significant deterioration in the
macroeconomic parameters like GDP growth, fiscal deficit, foreign trade,
unemployment, credit growth, savings rate, private consumption and investment,
etc. The inflation has also started worsening in last 3months months. Almost
70% of the population is facing stagflation like conditions with stagnant to
lower wages and rising cost of living. Besides, some new sectors of stress
emerged in the economy. The business and consumer sentiments are despondent.
On the positive side, many legislative and procedural changes
started to support the stability and growth. For example, the bankruptcy
resolution process gathered some pace, lending some stability to the banking
system; RERA also began to show some positive results with real estate sector
consolidating and developers with stronger balance sheets benefitting; bank
recapitalization and consolidation has progressed well and shall bear fruits in
next couple of years.
Besides, in principle decisions have been taken to privatize
large PSUs like Air India, BPCL, Shipping Corporation etc; the process for
development of a vibrant retail debt market has started on an encouraging note
with launch of PSU Bond ETFs; some significant changes have been implemented to
strengthen the regulation of financial markets and preventing frauds and misuse
of investors' funds.
Overall, many global & domestic agencies and experts have
expressed serious concern over the state of India's economic affairs, while
downgrading the growth forecast. Global rating agencies have even cautioned
about a possible rating downgrade, should the economic growth continue to
remain low.
Global economy remained in slow lane, but ending the year on
positive notes
The global economy, including the USA, Europe and China mostly
remained in the slow lane for most part of the year. Multiple trade conflicts,
most notably between US & China, US & Europe, Japan & Korea, slowed
down the trade considerably. The uncertainty over Brexit kept the businesses in
UK and Europe on the edge. The geo-political tensions, especially in the Middle
East Asia, Indian sub-continent and Korean peninsula also impacted global
trade. Consequently, most commodity producing economies struggled with
deflationary pressures.
However, towards the end of the year, some signs of stability
are emerging. A decisive mandate for conservative party in UK and lessened the
Brexit uncertainty considerably. There is some thaw in Sino-US trade relations.
The latest data from China has signaled bottoming out of commodity demand. The
central banks of US, BoJ, EU, UK, Canada, India, Australia etc., have all hit
the pause button in their latest policy reviews.
Sensing a revival in global economy, the global equities have
recorded decent gains in past few weeks.
The financial markets are jittery
While the benchmark equity indices have returned ~11% YTD 2019,
the broader markets have given up most of the gains made in 2017. Out of the 12
major sectors, only three could give positive return YTD, while 9 sectors gave
negative return. Core sectors like Commodities, Auto, Pharma and Consumption
have yielded a negative return YTD in 2019. Private Banks is the only segment
that has outperformed Nifty this year.
Cash (Liquid Fund and Bank Deposit) returns outperformed most of
the debt fund returns during the year.
This has happened despite five year high foreign inflows into
equities.
Socio-political conditions are tense
Insofar as socio-political conditions are concerned, the year
2019 has been marked with widespread student protests and cases of mob outrage.
Legislative changes like Abrogation of Article 370 and Enactment of Citizenship
Amendment Act has caused civil unrest in many states. The state center
relations seem to have worsened due to rising mistrust and antagonism.
Despite winning an overwhelming mandate in the general
elections, the BJP's footprints continue to shrink in state legislatures. After
losing the key states of Madhya Pradesh, Chhattisgarh and Rajasthan to the
Congress last year, BJP lost Maharashtra this year; and could form government
in Haryana with the help of opponent Chautala family.
Socially, while no one is starving to death, the people in
general continue to be restless like last year. The primary reason is
unreasonably high expectations from the government and aspirations driven by
such expectations. There is little indication that this gap between political
promise and actual delivery will be mending anytime soon.
Tuesday, December 17, 2019
The Solution lies within
Some of the headlines in yesterday's newspapers made interesting
reading:
A few days ago, the finance minister had categorically dismissed
the talks about changes in the GST rates. She was quoted having said that
"Buzz is everywhere other than in my office". Yesterday, West Bengal
Finance Minister Amit Mitra, who is also former head of GST Council and FICCI
General Secretary, reportedly, wrote to the finance minister requesting, “We
should not in any way tinker with the rate structure or impose any new cess at
a time when the industry and consumers are going through the most distressing
times with ‘stagflation’ knocking at our door (stagnation accompanies by
growing inflation).” (see
here) It is very difficult for a common man to assimilate, how such a senior
person would write an official request, if there is no buzz around.
The commerce minister highlighted that he has taken an exercise
to consult country’s top 25 corporate houses and lenders, to assess their
investment plans and also try and resolve their issues that they may be facing
in their bid to expand operations. The list of 25 included Aditya Birla Group
Chairman K. M. Birla, among others. (see
here)
The telecom minister expressed his displeasure over the comments
made by the promoters of beleaguered Vodafone-Idea, in which Birla group is
co-promoter. Referring to the comments made by Vodafone CEO that running
business in India may not be viable unless the government helps, the minister
said, “I don’t appreciate this kind of statement. Very firmly and very clearly.
We have given all the opening for doing business but no one should dictate
terms on us. India is a sovereign country...,” It is pertinent to note that K.
M. Birla has recently echoed the views of his British partner. (see
here)
Reportedly, As many as 43 out of 85 coal blocks allotted after
2015 to PSUs have yet to receive 159 clearances, mostly because allottee PSUs
have not taken necessary actions. These blocks were either auctioned or
allotted to public sector companies by the government following cancellation of
204 blocks, including 33 operational blocks, by the Supreme Court in 2014. (see
here) Incidentally, the incumbent commerce minister was in charge of coal
ministry during May 2014 to May 2019.
India now ranks much lower than Bangladesh on many parameters,
including GDP growth (8.15% in FY19). The latest is the gender gap. India is
now ranked 112, down 4 places since last year, in terms of gender gap amid
widening disparity in terms of women's health and survival and economic participation
-- the two areas where the country is now ranked in the bottom-five. Political
rhetoric and shenanigans apart, Muslim countries like Bangladesh (50th) and
Indonesia (85th) are doing much better than us in bridging the gender gap. (see
here)
The point is that the government is obdurately refusing to
accept that the solution lies within. Instead of introspecting they are relying
on "experts", "vested interests" and
"uninterested" for solutions. Obviously, they would not get the
appropriate answers.
In the spirit of Christmas
If 2018 was a tough year for investors in Indian in financial
markets, the year 2019 has been a even tougher. YTD return of ~11% on Nifty may
not be reflecting the pain and agony that the investors in Indian financial
markets may have suffered. The larger pain in fact may have been suffered by
the investors in the perceived to be "safe" debt instruments.
The year began with low business expectations and political
nervousness. The hopes of a stronger mandate to the incumbent regime and
consequent economic reforms, led a strong rally in the stock prices as the
process of elections commenced in March. The Euphoria soon fizzled with
presentation of a disappointing budget and imploding NBFC market, erasing all
gains for the year by the month of August.
The corporate tax cuts, alongside global rally in equity prices
witnessed a sharp recovery that took the benchmark indices to new highs in
November. December so far has been little volatile but mostly flat.
YTD 2019, Indian benchmark indices have significantly
underperformed the peers like Brazil and China, and developed markets like USA,
Germany and France. The pain has however been seriously accentuated in the
broader markets, where the small caps and midcaps that did exceedingly well in
2017 and early 2018, suffered massive value erosion.
The domestic flows into equity mutual funds that underpinned the
market rally in 2017 and market resilience in 2018 (and most part of 2019)
appear to have tapered towards the end of the year. Though, foreign portfolio
investors (FPIs) turned significant buyers in 2019, after turning net sellers
in 2018. The net FPI investment in Indian equities in YTD 2019 is 65% more than
the cumulative net flows of previous 4 calendar years (2015-2018).
The debt funds returns continued to be impacted by losses on
NBFC portfolios, rise in bond yields and large number of rating downgrades.
Some Fixed Maturity Plans failed to deliver the promised returns. Many debt
fund returns were below the bank deposit rates, despite higher risk. Credit
risk fund (below AAA corporate bond funds) were very low to negative.
Like end 2018, many market experts are drawing comfort from the
below par performance of Indian equities in 2019, in true Christmas spirit.
Most are expecting (or rather hoping!) that the markets might have already
suffered their worst, and 2020 could be a positive year.
FY20 is most likely to end as sixth consecutive year of earnings
disappointment. The expectations for earnings in FY21 are expectedly running
high. Currently the consensus seems to be placed around 25-28% earnings growth
in FY21, over a low base. The corporate commentary however is not that sanguine
and leaves scope for disappointment and earnings downgrades.
As a ritual, regardless of the outcome and consequences, most
experts forecast their respective targets for the benchmark indices 12months
hence based on their respective assessment of the macro and corporate
environment. These forecasts are charitably received, notwithstanding the
accuracy or otherwise of previous such forecasts, only to be discarded just
like old calendar and diaries.
Following the rituals, I too invariably join in the spirit of
Diwali and Christmas. Using these discreet points in the ad infinitum, I
like to pause, reflect back, review and revise my strategy and action plans.
Accordingly, as part of the overall exercise, I would be
reviewing my outlook and investment strategy for 2020 and sharing my thoughts
with the readers through this column.
Friday, December 13, 2019
Household health survey
The National Statistical Office (NSO) recently released findings
of the 75th round of National Sample Survey relating to Household expenditure
on health (see
here). The findings highlight some important socio-economic trends,
especially related to the health of the nation. The following are some of the
noteworthy points:
(1) 7.5% of the respondents
reported having some ailment within 15 days preceding the survey.
The urban population, especially urban women, may be the
unhealthiest segment of the population. 10% of urban women reported ailment, as
compared to all India average of 7.5%. In urban population 9.1% people reported
ailments as compared to 6.8% for the rural population.
~28% of the people in 60+ age group reported ailment, whereas
only ~11% were ailing in 45-59 age group.
(2) ~3% of the respondents
were admitted to a hospital in preceding 365days. However, for persons in 60+
age category this ratio was 8.5%. While more women reported ailment, the
hospitalization rate was higher for male in general, and urban male in
particular.
(3) More people (55%)
availed treatment in a private hospital, as compared to government hospital
(42%). Charitable hospitals accounted for ~3% of the patients.
(4) Insofar as the ailment
wise treatment is concerned - private doctors/clinics were approached for 43%
of the ailments. Government hospitals (30%) and private hospitals (23%) were
approached for lesser number of ailments.
(5) Only 14% of rural
population and 19% of urban population is covered by medical insurance. Most of
the rural coverage is through government sponsored health insurance schemes.
About 9% (out of 19%) urban population is also covered through government
schemes. Only 1% of rural population is covered as employee of government/PSU,
while for urban population this ratio is 6%.
(6) Allopathy is the preferred method of treatment for 95% of the
population in both rural and urban areas.
(7) On an average, Indian
spend Rs26475 per hospitalization in urban areas and Rs16676 in rural areas.
The average expense in case of a government hospital is Rs4452, whereas for a
private hospital it is 7 times higher at Rs31845.
(8) Childbirths are now
mostly institutional. In rural areas 90% deliveries took place in hospitals.
For urban areas this ratio was 96%.
The notable point is that in government hospitals, only 17%
child births were done through surgery, while for private hospitals, this ratio
was staggering at 55%.
(9) 97% of both boys and
girls had received vaccination in rural India. 98% of boys and 97% of girls had
received vaccination in urban India. 59% of boys and 60% of girls at all-India
level had been fully immunised (i.e., received all 8 prescribed vaccinations).
I read three primary trends from these data points.
(a) Population is
increasingly becoming unhealthy and the insurance cover is not adequate.
(b) Private hospitals may
be disproportionately expensive, and may require more regulation.
(c) Healthcare may become
a major crisis in 20-25yrs, as the demography begins to change.
Thursday, December 12, 2019
Check whether you need professional intervention in investment strategy review
A lot of people have enquired about the dichotomy in the market,
i.e., the benchmark indices are ruling close to all time high levels, while not
many portfolios have returned positive returns during 2019.
I would say, the return of a portfolio of equity stock is
function of its construct and efficiency of management. The returns may vary
dramatically depending upon the stock selection and quality of the management.
So it would not be fair for me to comment on the performance of any particular
portfolio. Nonetheless, the following data points may be pertinent to note in
this context.
(a) At Tuesday closing
level, Nifty is higher by 9.2% YTD. But, the market capitalization of NSE is
higher by ~4% during this period.
Given that Nifty represents about 70% of the total market cap,
it is safe to assume that most of the companies outside Nifty have lost their
value during the year.
Moreover, 28 of the 50 constituents of Nifty have yielded
negative return during the year, the market breadth appears even narrower than
what Index performance may indicate.
(b) YTD, Nifty Small Cap
100 has lost ~14% value and Nifty Midcap 100 Index has lost ~8% value.
(c) Of the 1600 odd stocks
regularly traded on NSE, only 25% have returned positive yield YTD. 75% stocks
have lost their value during the course of 2019.
(d) To make the situation
even worse, over 28% of the stocks regularly traded on NSE have lost more than
50% of their value during the course of 2019. This set includes frontline
stocks like Reliance Capital (-95%), Reliance Infra (-93%), Jet Airways (-93%),
Yes Bank (-75%), Vodafone Idea (-72%), IndiaBulls Housing (-69%).
(e) Out of the 18 major
sectoral indices, 10 have returned negative yield YTD. Media (-32%), PSU Banks
(-22%) and Metal (-20%) are the worst performing indices. Auto sector yielded a
negative return of -16% YTD.
(f) Private banks (driven
mostly by HDFC Bank, ICICI Bank and Kotak Bank) outperformed with a 13% YTD
return. Energy (driven mostly by Reliance) also returned 13% YTD yield.
(g) In true sense, Realty was the best performing sector that
returned 20% YTD return. The reforms (RERA) and lower rates perhaps helped the
sector.
Considering this, in my view—
(i) Anyone who could
protect his/her capital and cover the opportunity cost of investing in equities
(6% in liquid fund or fixed deposit) has performed well during 2019.
(ii) Investors who could
also cover the inflation (4%) by earning ~10% must be considered above par.
(iii) Investors earning more
than 10% by design (and not purely by chance) must evaluate, whether they took
unnecessary risk for earning that kind of return. If not, they are rock stars.
(iv) Investors who have
lost more than 10% value in their portfolio may need professional help for
reviewing their investment strategy.
(v) All others are well
placed and need not worry too much.
Wednesday, December 11, 2019
Industry and Services sector transformation agenda implemnetation still at take off stage
In the three year agenda released in 2017, NITI Aayog noted that
"unemployment is the lesser of India’s problems. The more serious problem,
instead, is severe underemployment. A job that one worker can perform is often
performed by two or more workers. In effect, those in the workforce are
employed, but they are overwhelmingly stuck in low-productivity, low-wage
jobs...Therefore, what is needed is the creation of high-productivity,
high-wage jobs."
The action agenda therefore emphasized on increased emergence of
larger, organized-sector firms that can create high paying jobs. To meet this
end, promoting exports was considered a better option rather than trying to
substitute imports by producing in India.
The agenda paper accordingly highlighted that "A focus on
the domestic market through an import-substitution strategy, however attractive
it may seem, would give rise to a group of relatively small firms behind a high
wall of protection. They will not only fail to exploit scale economies but also
miss out on productivity gains that come from competing against the best in the
world. The electronics industry offers a case in point. Our domestic market in
electronics as of 2015 is only USD 65 billion. In contrast, the global market
is USD 2 trillion. Our policy of import substitution under high protection has
given rise to a group of small firms none of which is competitive in the world
markets. In contrast, a focus on the global market can potentially result in
output worth hundreds of billions of dollars and hence a large number of
well-paid jobs."
NITI Aayog underlined the demographic advantage and wage
competitiveness of India vis a vis China, while spotting an attractive
opportunity in shift of businesses from China. It noted "Today, with
Chinese wages rising wages due to an ageing workforce, many large-scale firms
in labour-intensive sectors currently manufacturing in that country are looking
for lower-wage locations. With its large workforce and competitive wages, India
would be a natural home for these firms. Therefore, the time for adopting a
manufactures- and exports-based strategy could not be more opportune. Keeping
this context in view, the Action Agenda offers detailed proposals for the
implementation of an exports-based strategy. Among other things, it recommends
the creation of a handful of Coastal Employment Zones, which may attract
multinational firms in labour-intensive sectors from China to India. The
presence of these firms will give rise to an ecosystem in which local small and
medium firms will also be induced to become highly productive thereby
multiplying the number of well-paid jobs."
The Action Agenda in particular offered "specific proposals
for jumpstarting some of the key manufacturing and services sectors, including
apparel, electronics, gems and jewellery, financial services, tourism and
cultural industries and real estate."
After two and half years, the implementation of the agenda is
found lacking on almost all fronts.
(a) Industrial
production growth has slipped.
(b) Work force
participation rate has slipped to multi decade low. Unemployment rate is
highest since 2011. Labor productivity growth is at lowest level in a decade.
(c) Exports are
mostly stagnant. Imports are marginally higher.
(d) No significant progress
is seen on coastal zones, increase in port capacities. The work on dedicated
freight corridor has progressed but still running much behind the revised
schedule.
(e) Some impressive
projects have been announced by some major global manufacturers. However, on
ground little progress is visible. In 2018 the import of telecommunication
equipments was highest in five years. FDI has been lower in 2018 and 2019 as
compared to 2017.
Tuesday, December 10, 2019
Agriculture sector transformation agenda implemnetation is lacking
Continuing from last week - 3yr
transformation agenda - did it work?
The NITI Aayog's 3yr agenda for transformation for agriculture
sector recognized that "Enhancing agricultural productivity requires of
efficiently using inputs, introducing new technologies and shifting from low to
high value commodities."
The data available for first two years (FY18 and FY19),
indicates that little progress has been made in implementation of the proposed
transformation agenda. The following points are pertinent to note in this
context:
(a) The share of
agriculture sector in total GVA has fallen from 17.9% in FY17 to 16% in FY19.
In Fy15, it was 18.2%.
(b) The horticulture crops'
production grew from 300643MT in FY17 to 313851MT in FY19, an average annual
growth rate of ~2%, much lower as compared to ~3.5% growth seen food grain
production in FY18. Fruit production and productivity both fell in FY19. The
productivity of vegetables, flower and plantation crops also declined in FY19.
(c) The growth in total
GVA in agriculture and allied sectors moderated from 7.9% in FY17 to 6.9% in
FY18 and further to 6.5% in FY19. Within this the agriculture, forestry and
fishing GVA growth fell from 6.3% in FY17 to 2.9% in FY19.
(d) The share of
expenditure on agriculture research and education in agriculture GVA fell to
0.32% in FY18 from 0.36% in FY17, before recovering to 0.37% in FY19. By any
standard this allocation to research and education is dismal given the poor
productivity levels and urgent need for transformation in agriculture sector.
(e) The investment
agriculture sector fell from 15.6% of Agriculture GVA in FY17 to 15.2% in FY18.
(f) The MSP for staple
crops has been increased by 6% to 19% during FY19. Paddy saw an increase of
13%, Wheat 6%, Soyabeen 11% and Maize 19%. UP government has not increased SAP
for sugarcane for sugar season 2019-2020. To double in 5year, the farmers' income
must grow at a compounded rate of 14.5%. As of now, the target looks quite
challenging.
(g) The
production/availability of certified/quality seeds improved less than 5% from
3802904MT in FY17 to 3988899MT in FY19.
(h) India met 56.57% of its
domestic demand for vegetable oil through imports in FY17. In FY18 the share of
imports had risen to 59.31%.
(i) The consumption of
fertilizers increased by 2.4% to 265.91 lac ton in FY18, though it was still
lower than the consumption of 267.53 lac ton in FY16. Urea production fell from
306.35 lac ton in FY16 to 298.94 lac ton in FY18.
(j) The funds released
under the flagship Soil Health Management (SHM) decreased from Rs95.5cr in Fy17
to Rs71.67 crore in FY19. In FY18 the funds released were just 41.18crors.
It can be reasonably construed from above selective data points
that the government is lagging behind in implementation of its ambitious agenda
for transformation of agriculture sector.
(Data Sources: Annual Report FY19, Department of Agriculture,
Cooperation and Farmers Welfare, Economic Survey for FY19 and CEIC)
...to continue tomorrow
Thursday, December 5, 2019
3yr transformation agenda - did it work?
In 2017, NITI Aayog released a three year action agenda to
transform all three major sectors of economy, namely agriculture, industry and
services. The agenda was supposed to be implemented over 3year period FY18-FY20
For the farm sector, the agenda highlighted that "Farmers
make up nearly half of India’s workforce. Therefore, for India to flourish, its
farmers and the farm economy must prosper."
Accordingly, the Action Agenda outlined a strong programme for
agricultural transformation, including numerous measures to raise farm
productivity, bring remunerative prices to farmers, put farmers’ land to
productive uses when they are not able to farm it themselves and improve the
implementation of relief measures.
The Draft offered an ambitious agenda for empowering the rural
population through improved road and digital connectivity, access to clean
energy, financial inclusion and “Housing for All.”
The Draft recognized that "Enhancing agricultural
productivity requires of efficiently using inputs, introducing new technologies
and shifting from low to high value commodities."
It also highlighted that higher farm productivity would require
expanding the scope of irrigation to increase crop intensity, improvement in
access to irrigation, enhancing the seed replacement rate and encouraging the
balanced use of fertilizers.
The Draft agenda emphasized that "Precision farming and
related new technologies, that allow highly efficient farming and conserve
resources, must be spread through appropriate policy interventions."
Reforming APMCs, redefining the system of support prices for
crops, land reforms to make the landholdings of marginal farmers viable, and
adequate social security program for farmers to deal with stress due to natural
calamities etc. were some of the key suggestions.
The agenda stressed that to achieve the goal of doubling
farmers' income by 2022, "Conditions conducive to shift into high value
commodities such as horticulture, dairying, poultry, piggery, small ruminant
husbandry, fisheries and forestry need to be created."
For the industry and services sector, the agenda found that
underemployment and hence lower worker productivity is a more serious problem
in India, rather than unemployment, which has remained mostly consistent
between 5-8% through past many decades.
Accordingly, the Draft, emphasized on creation of
high-productivity, high wage jobs. To meet this end, it was highlighted, that
focus must be on measures necessary for the increased emergence of larger,
organized-sector firms.
While recognizing steady progress in the services sector, the
Agenda offered specific proposals for jumpstarting some of the key
manufacturing and services sectors, including apparel, electronic goods, gems
and jewellery, financial services, tourism and real estate.
Now as we draw close to the end of the target three year period,
it would be worthwhile to assess the execution status of the ambitious agenda.
I shall examine the actual implementation of the agenda over next few days, but
prima facie two things appear rather conspicuous to me:
(1) The replacement of the
Planning Commission with the NITI Aayog needs to be evaluated by the CAG. In the
interest of transparency and accountability, the government must also consider
issuing a White Paper on this issue. The way NITI is building its bureaucracy
and organizational staff, there appears almost no difference.
(2) Like other things, the
execution level of this agenda may also be below par.
Wednesday, December 4, 2019
Derisking political risk
The first thing what the incumbent Chief Minister of Andhra
Pradesh did after assuming charge of office was to order cancellation of many
projects awarded by the preceding government (see
here). The Andhra Pradesh Government also decided to reopen power purchase
agreements (PPAs) inked under the previous TDP government, that could
potentially bring 5.2GW solar and wind energy projects with an estimated debt
exposure of over INR21,000cr under stress (see
here). The state moved ahead with this proposal despite strong request from
central government (see
here) and order of the High Court (see
here).
Subsequently, the World Bank decided to "drop" funding
of “Amaravati Sustainable Infrastructure and Institutional Development
Project”, seriously affecting the future of the project which has already
swallowed Rs 45,000 crore worth of public money with less than twenty per cent
of the work completed. (See
here) Following the World Bank, the Asian Infrastructure Investment Bank
(AIIB) also decided to withdraw from funding the project. The multi lateral
agencies took the decision to withdraw funding after the Central Government
withdrew its request for funding of this project. Last month, the state government
finally decided to abandon the project leading to severe financial loses to
many contractors and the state exchequer.
If a number of small and medium contractors are to be believed,
the Chief Minister Office has also ordered a hold on payments due to them for
various projects under execution, and some even fully executed, pending
investigation of any irregularity in awarding of contracts by the preceding
government.
The incumbent Chief Minister of Karnataka had also expressed his
intention to review the decisions taken by the preceding government,
jeopardizing financial interests of numerous contractors and vendors.
Reportedly, the new government in Maharashtra is also treading
on the same path. They have already ordered suspension of the Metro rail shed
project for which most of the ground work has already been done. Apparently,
Chief Minister Uddhav Thackeray has told media that he has ordered a review of
all on-going development projects in the state, including the Mumbai-Ahmedabad
bullet train. Interestingly, in this case the party of the incumbent Chief
Minister was also part of the outgoing government.
This practice of cancelling or suspending ongoing projects and
harassing the contractors & vendors is certainly not a good sign for the
economy. On one hand, this shall dissuade many small and medium sized vendors
from participating in the government business; while on the other hand it shall
cause totally avoidable delay in execution of projects, in many cases impacting
the viability of the project itself.
I think there is an urgent need to rework the standard
government contracts to provide for protection to the contractors and suppliers
against any such review, suspension, cancellation etc. unless the charges of
corruption in award of the contract are conclusively proved in a court of law.
In my view, a better solution for de-risking the projects from
political risk would be to create a middle layer that cushions all the third
party contractors and vendors from political changes. All the state governments
and the central government may be required to form a specialized project
executing company. Once the government finalizes the project after obtaining
all the approvals etc, the government should award the project to this company
through an irrevocable contract and transfer necessary funds to it in the form
of cash and marketable government securities. This company in turn should
sub-contract it to the third parties. The intermediary company should be
responsible for making timely payments to the contractors and suppliers, and
ensuring timely execution of the projects.
Tuesday, December 3, 2019
Demonetization, GST major culprits for growth slowdown
As expected, the GDP growth data for 2QFY20 came out to be poor.
In the quarter ended September 2019, India's real GDP grew 4.5% and GVA grew
4.3%, the lowest rate of growth in 6years. The latest economic growth rate of
India is now lower than China, Indonesia, Myanmar, Vietnam, Philippines, and
similar to Malaysia.
The supply side data explains that the slowdown is pervasive and
all sectors of the economy are struggling. Industrial sector was stagnant with
manufacturing recording its first quarterly contraction in a long time.
Services grew less than 7%, the lowest pace in 2years. Despite above normal
monsoon, the agriculture growth at 2.1% was also lowest for the second quarter
of a fiscal in many years.
On the demand side, private consumption grew 5.1%, slightly
better than 3.1% in 1QFY20, but dismal in comparison to historical trends.
Investments grew barely at 1%. Both exports and imports contracted for the
first time since 2016. Import contraction of 6.9% despite weaker rupee further
highlights the poor demand conditions.
This poor GDP growth data was supported to a great extent by the
government expenditure which grew at 11.6%, highest rate in 6 quarters. Given
that the government has already surpassed its fiscal deficit target for FY20,
the tax collections continue to be sluggish and the nominal GDP is slipping at
a faster rate than real GDP, it would reasonable to assume that the slowdown
may persist for few more quarters at the least.
Regardless of what the government spokespersons and some
enthusiastic market analysts may say, it is highly likely that we may end up
FY20 with sub 5% growth. Given the fiscal challenges and intensifying global
slowdown and deflationary pressures, we may struggle to grow more than 6% in
FY21 as well, despite lower rates, taxes, and base effect and improving credit
availability.
Based on an informal survey of traders, SME and professional, I
am inclined to conclude that this sub 5% growth trend may persist for at least
next 3 to 4 quarters. The key feedback from the survey could be listed as
follows:
(a) The growth rate shall
slip further as the government continues to be in denial mode insofar as the
most important cause of slow down is concerned.
(b) Most respondents
highlighted that lingering effects of demonetization and serious faults in GST
processes are reasons for the slowdown.
(c) Demonetization has hit
the small businesses very hard. It has destroyed the traditional sources of
short term financing for traders and small businesses, increased the working
capital cycle, constricted the inventory holding and business expansion
capacity and increased the cost of doing business. Many of these SME businesses
were critical part of the supply chain of the larger businesses. It has
therefore affected the larger businesses also indirectly. Poor business
conditions for large number of small businesses have obviously impacted the
employment and consumption demand conditions. There is nothing to suggest that
these conditions shall correct on their own in near future.
(d) The implementation of
GST has been hasty and seriously flawed. More than 75% of GST assesses must be
facing problems of reconciliation, wrongful disallowance of credit, defaults,
harassment, corruption, and/or delayed (or no) refunds. A careful examination
indicates that the system is even more problematic and cumbersome than the
erstwhile Excise, VAT and Sales Tax regime. Unless the GST system and processes
are streamlined for seamless flow of credits and payments, any meaningful
acceleration in growth rate looks highly improbable.
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