Vijay Kumar Gaba

Thursday, February 13, 2020

Budgetary allocations - misplaced priorities

I had briefly mentioned about some lacunae in the intent expressed in the budget speech of the latest finance minister and elsewhere by the incumbent government, and the actual resource allocations made in the Union Budget 2020. (see here)

A careful analysis of the budgetary allocation prompts three issues that need to be seriously contemplated, viz.—

(1) The need to correct misallocation of resources, which is primarily a consequence of the misplaced priorities of the governments in the past many decades.

(2) Lack of political intent to do fresh (zero based) thinking on the national priorities in the current socio-economic context. The changes in budgetary allocation are therefore incremental and less effective. The instances of resource wastage are frequent and unfortunate, given the scarcity of resources.

(3) Food subsidy continues to be the highest allocation in the budget despite decades of poverty alleviation efforts. This highlights the major weakness of our political mindset, which continues to be feudal in nature - provision for the subject instead of enablement and empowerment of citizens has been the approach of almost all governments that have been power since independence.

The changed demographic of the country necessitates significantly higher allocation to the human resource development. This is not only a national requirement for any government in India but also a responsibility of India towards the global community being the home to the largest number of youth in the world.

The allocations to Depart of Higher Education (1%), Department to Youth Affairs & Sports (0.2%), Department of School Education and Literacy (0.06%), are almost ridiculous in the wider context, even if we consider the amount mobilized through Education Cess.

India is infamously known as diabetic capital of the world. Obesity, Hypertension, Tuberculosis (TB) and Cancer have also assumed almost epidemic proportions in most towns of the country. Under these circumstances, healthcare and social security of the citizens must be a top priority. The finance minister in fact highlighted in her budget speech that government want to eliminate TB in next five years. But the budget allocations to Department of Health & Family Welfare (1.17%), Ministry of AYUSH (0.02%) are certainly commensurate with the need.

Rs 47805cr is provided for the urea subsidy, which is believed to be one of the reasons for soil and water contamination and health related issues. Whereas on the other hand, appx Rs 9300cr has been provided for health, family welfare, health research and AYUSH.

Employment is widely believed to be one of major crisis in India's socio-economic context. The government was expected to give top priority to the employment generation efforts. The government had been expressing this as one of the top priorities. However the budgetary allocations totally belie this intent.

Ministry of Labor and Employment gets just 1% of the budgetary allocation. The departments considered critical for employment generation like MSME (0.88%), Textile (0.4%), Tourism (0.29%), Animal Husbandry and Dairy (0.16%), Culture (0.07%), Panchayati raj (0.001%) are given miniscule allocations.

Despite all the promises and pressing needs, the department of renewable new and energy gets 0.68%, against 5.15% for Petroleum & Natutal Gas.

Wednesday, February 12, 2020

Corporate credit profile continue to deteriorate

A recent report of India Ratings & Research (A Fitch group company) makes some very interesting observations about the corporate credit profile of India. The report highlights that corporate credit profile is deteriorating progressively and this trend is likely to persist in near term, implying that (a) the stress in the financial system may not ease materially in the near term and (b) the credit growth that is struggling at the multi year low levels may not see any significant improvement in the next few months at least.

The key highlights of the report could be listed as below:

Rating downgrades by India Ratings and Research (Ind-Ra) increased sharply in 9MFY20, with the number of upgrades reducing dramatically.
Defaults were significantly higher at 4.9% of all issuers reviewed during this period, as compared to 2.9% last year.
Utilities and capital goods industries together contributed to the most number of defaults at 31%.
Rating changes for 9MFY20 was 30%. A and BBB rating categories were hit by high downgrades.
Increasing working capital intensity and deteriorating profitability resulting from the prevailing demand slow down are the leading reasons for the rating downgrades in more than half of the cases.
Working capital challenges were more pronounced in investment-linked sectors, particularly w here state governments w ere counterparts or issuers had export exposures. Issuers faced significant delays in collections.
Interestingly, issuers which saw revenue growth also witnessed downgrades as operating profits were seen contracting 250bps. Since many of these issuers were leveraged higher than their peers, it weakened their financial metrics to an extent that they could no longer sustain the ratings.
Demand pressures saw the consumption-linked sectors with a higher proportion of downgrades at 51%, followed by investment-linked sectors at 43% and the rest by financial sector companies. Capital goods (mainly tier II construction & engineering), utilities (renewable energy issuers) and food, beverages and tobacco (FBT) industry were the most impacted.

Capital goods faced multiple headwinds of slower order book growth, lower profitability and increasing working capital pressures. Despite the expected large infrastructure spending announcements by the government, the credit pressures are expected to persist over the medium term.

Downgrades in the utilities industry, was because of mounting receivables from state distribution companies (discoms) and uncertainty of some discoms honouring existing power purchase agreements.

The consumption slow down witnessed during the year has intensified the demand-side challenges, given that private investment has been in a slow lane and export growth has remained tepid because of the global demand and trade dynamics.

At end-December 2019, 13% of the ratings (FY19: 6%) were on a Negative Outlook or on Rating Watch Negative, indicating that the pressure on corporate credits to persist for at least the next two to three quarters.