Expert Zone
Straight from the Specialists
Rating downgrade a credible threat for India
(Rajiv Deep Bajaj is the Vice Chairman and Managing Director of Bajaj Capital Ltd. The views expressed in this column are his own and do not represent those of Reuters)
Indian stock markets have hardly gone anywhere since June, with the Nifty hovering in the 8-9 pct range. But the coming months may see a breakout of this range as volatility, as measured by the India VIX index, seems to be rebounding from four-year lows, after having fallen for three months in a row. A short-term break, out of the range, on the downside seems more probable.
Having said that, the recent collapse in stock prices of some companies, in which promoters had pledged a significant portion of their stakes, shows that the system is cutting down on leverage at the very grassroot level — the stock broker. When this happens, you know that ‘the bottom is nigh’.
The near-term outlook for Indian markets, however, also hinges on developments in the U.S. and Europe. U.S. equities seem to be at the height of their infatuation with QE3 and may be in for a rude jolt.
The recent leg of the rally in U.S. equities that started in June seems to be tiring out while Europe behaves like someone who promises a lot but yields nothing. As far as quantitative easing is concerned, the law of diminishing marginal returns has kicked in. Financial markets have turned less responsive every time the bond-buying bazooka is pulled out.
On the domestic front, the probability of mid-term polls is low simply due to the lack of a strong alternative, despite occasional rumblings by some regional parties claiming to build a ‘Third Front’. If at all a Third Front materialises and gains power, we know what to expect, going by our experience of the 1990s.
A sovereign rating downgrade remains a credible threat due to India’s dependence on foreign capital flows in the wake of a persistent current account deficit. India’s rating at BBB- is already at the lowest ‘investment grade’ level and a step away from being accorded junk status. S&P had cut India’s outlook to negative from stable in early April.
Economic consequences of deadlock in Parliament
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The monsoon session of Parliament has been a washout without any important business being transacted. This has been made out to be a political strategy on the part of the Bharatiya Janata Party (BJP) to force early elections. Obviously, the Congress-led coalition is unlikely to oblige. The unintended victim is the economy which has been stopped from getting back to growth.
There are a number of important Bills pending in Parliament. The Banking Laws Amendment Bill, the Pension Fund Regulatory and Development Authority Bill and the Insurance Laws Amendment Bill, when passed by Parliament, could have attracted foreign investment.
But political games have to have priority. And looking at the targets and strategies of political parties it is unlikely that Parliament would resume legislative work any time soon. The economy had already lost its momentum with growth dropping from 9 to 5.5 percent, landing the economy into growth stagnation.
The government has been suffering from some kind of inertia. Moody’s Analytics described it as having ‘lost its way’. More rating agencies may be of the same view and with no reforms in sight and no improvement in governance, it is likely that the country may be downgraded. But that will not make much of a difference because growth will not drop any further and the stock market will not plunge any deeper. The economy will just muddle through until 2014.
Prime Minister Manmohan Singh and Finance Minister P Chidambaram seem determined to change the trend. Two expert committees were appointed to suggest steps to reverse policy pessimism. The Shome Committee has recommended postponement of GAAR by three years and greater scrutiny of the Supreme Court verdict in respect of Vodafone. That itself livened up the stock market which had landed into depression since the budget. The Kelkar Committee made the inevitable recommendation for an increase in the administered prices of diesel and LPG.
What is now necessary is action. But action is possible only after the present session of Parliament. The recommended increase in the price of diesel and LPG will be a test case. Will the government take the bull by the horns or will it succumb once again to pressure from its allies?
Indian markets stuck in a rut
(The views expressed in this column are the author’s own and do not represent those of Reuters)
It’s now been close to four years since domestic and global financial markets have been in a state of flux, plagued by uncertainty, as a slowdown ensures that government after government revises its growth forecast downwards.
The IMF, the rating agencies and the entire tribe of analysts have been either on a rating downgrade spree or have substantially revised growth projections of economies across the globe. Governments globally, on the other hand, have been splashing around to stay afloat by announcing policy measures or financial subsidies to support their economy, or have been just sitting around doing virtually nothing, like in India.
While the consumption story and the sheer weight of the FII fund inflow into the capital markets continues to support the Indian equity markets, concerns within the domestic economy abound. Coalgate, 2G, GAAR, rising crude oil price, continuation of huge petroleum product subsidies leading to a huge fiscal deficit and leaving the largest petroleum companies in India bleeding under the burden of losses, high levels of inflation, high interest rates eating into company profits and preventing revival of the investment cycle, complete lack of will to undertake policy reforms, unheard of levels of corruption, a continuing logjam in parliament due to Coalgate, the list is endless. All this has led to the impending threat of a further downgrade of the Indian economy — virtually to junk status.
What will all this lead to? A mid-term poll in India? Investors losing faith in equity markets? Will equity markets head steeply downwards? There are too many questions with no visible answers.
The fact remains that despite knowning about a serious governance deficit, a burgeoning fiscal deficit and sharply falling GDP growth, FIIs have pumped in more than $10 bln in the Indian equity markets YTD. This clearly indicates that when compared to other economies, 5.5 pct GDP growth — high in relative terms — will continue to attract global investments. Secondly, unless India runs into a de-growth scenario (not impossible for its set of politicians and bureaucrats), we may not see a run on Indian equity markets. In other words we can rule out a sudden sharp crash.
The Indian economy and the government had everything going in its favour a few quarters back, but has completely lost momentum, lost the faith of several large investors globally, lost the confidence of its prominently contributing corporate sector, all of this its own doing.
GAAR-supported bounceback tough to sustain
(The views expressed in this column are the author’s own and do not represent those of Reuters)
A reversal after four weeks of gains saw the Nifty closing 2.38 pct lower at 5258. The mid-cap segment of the market caved in earlier with the large caps holding fort till Thursday. The Parliament logjam continued on the “Coalgate” issue and hopes of any worthwhile business being conducted in this monsoon session are dim. Given the political scenario, the war-rooms of political parties are getting into election mode, which could be earlier than 2014. This too will hardly raise hopes for Indian markets as the electorate seems too fractured to have a strong government which would have the ability to push through reforms, including non-populist ones.
Finance Minister Palaniappan Chidambaram who had raised hopes of implementing far-reaching reforms may not be third-time lucky. Though he has been among the most effective finance ministers in the past, the performance is also a factor of the environment which is not conducive currently. Apart from negating the effects of GAAR and tinkering with minor irritants in the system, I doubt whether he will be able to take any path-breaking measures. The Direct Taxes Code too has been deferred by a year.
World markets also ended the week on a softer note though Friday saw improved sentiment with Fed Reserve Chairman Ben Bernanke defending earlier stimulus measures. The European Central Bank meets on Thursday and the U.S. monthly jobs report on Friday would be keenly watched. China manufacturing PMI for August fell to 49.2 pct indicating a shrinkage as the result of the euro zone slowdown. This in turn will have a negative effect on commodities, especially metals and drive the authorities for further stimulus.
Closer home, GDP grew 5.5 pct against a consensus estimate of 5.2 pct. Auto sales continue to weigh in favour of diesel vehicles as the government is not in a position to tinker with diesel prices. A recent study indicates that nearly $4 billion of diesel subsidy is enjoyed by affluent consumers, accounting for nearly 22 pct of total consumption.
Maruti’s domestic sales fell 35 pct due to the month-long Manesar plant lockout. On the contrary both diesel vehicle manufacturers, Tata Motors and Mahindra & Mahindra, saw higher sales of 33 pct and 20 pct respectively albeit on a lower base.
The monsoon continued improving to significantly bridge the deficit which has reduced to 12 pct below long-term average (LTA). This will moderate the pressure on the central government from those states which have been clamouring for drought relief. The effect of El Nino too is not expected to be severe as it would be more towards the end of the monsoon season. Sowing of kharif crops increased to 35 mln hectares which is marginally higher than the normal of 33 mln hectares. However, certain kharif crops like oilseeds, pulses and coarse cereals are still affected.
Challenging times but hopes of recovery after 2014 polls
(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)
These are possibly the most challenging times for India because, simply put, every goal post seems to be oscillating.
The United States is gradually moving back to oil and energy self-reliance. Oil-led inflation in the U.S. may no longer be a threat.
The labour arbitrage with China, originally seen as an antidote to inflation will not remain relevant. The U.S. clearly looks to provide local jobs which can only happen in the manufacturing sector.
What this means is a shift in jobs, debt surpluses, trade flows and most importantly growth moving from China to the U.S. over the next two years. The most significant fallout will be withdrawal of quantitative easing as the U.S. economy recovers. The good news for India may be the possible drop in oil prices.
The immediate challenge, however, is decommissioning the euro pressure cooker.
A crisis emerges every couple of months. We had the French and Greece elections last quarter. Now you have Bundesbank Chancellor Weidmann’s comments against further support; “putting them on drugs” he says.
Liquidity reigns supreme as market ignores data points
The Nifty crossed 5350 levels last week after nearly three months with strong buying by FIIs, closing about two pct higher at 5320. Stronger than expected U.S. payroll data, positive cues from the euro zone and comments from Finance Minister Palaniappan Chidambaram assuring to unveil a path of fiscal consolidation and undertake remedial measures to revive the domestic economy, boosted investor sentiment.
However, negative IIP data along with weak corporate results disappointed the markets in the latter half of the week, causing the indices to trim some of the earlier gains.
On the domestic front, IIP data saw a contraction of 1.8 pct for the month of June. The poor numbers may pose a strong case for rate cuts in the future, but with inflation fears looming large, the Reserve Bank of India may continue with its hawkish stand.
FIIs have made purchases of $64 mln till date. This comes on the back of substantial purchases in July when they bought shares with a net worth of $176 mln. The liquidity-driven rally will tire out if it’s not backed by policy action and data points, both of which seem doubtful in the near future. But as of now, the markets are dictated by liquidity flows.
Monsoons have picked up with rainfall deficiency dropping from 22 pct to 17 pct but the damage seems to have been done to a large extent.
The India Meteorological Department (IMD) expects normal rains in August — a critical month for summer crops. It expects rainfall to be 5-6 pct below average in September due to the possibility of El Nino setting the stage for a dole out from the centre.
The new finance minister is facing the onerous task of bringing the government’s financial house in order with expenses exceeding revenues, mainly due to subsidies for the ‘3Fs’ — fuel, food and fertilizer — but he has reassured that he would ‘try’ to rein in the subsidy burden. Given the political equation and elections slated in the next 18 months, it remains to be seen how the finance minister would carry on with this arduous task, as elections sops would add to the burden of the already heavily saddled exchequer.
What money can buy
By Raghuram Rajan The opinions expressed are his own
In an interesting recent book, What Money Can’t Buy: The Moral Limits of the Market, the Harvard philosopher Michael Sandel points to the range of things that money can buy in modern societies and gently tries to stoke our outrage at the market’s growing dominance. Is he right that we should be alarmed?
While Sandel worries about the corrupting nature of some monetized transactions (do kids really develop a love of reading if they are bribed to read books?), he is also concerned about unequal access to money, which makes trades using money inherently unequal. More generally, he fears that the expansion of anonymous monetary exchange erodes social cohesion, and argues for reducing money’s role in society.
Sandel’s concerns are not entirely new, but his examples are worth reflecting upon. In the United States, some companies pay the unemployed to stand in line for free public tickets to congressional hearings. They then sell the tickets to lobbyists and corporate lawyers who have a business interest in the hearing but are too busy to stand in line.
Clearly, public hearings are an important element of participatory democracy. All citizens should have equal access. So selling access seems to be a perversion of democratic principles.
The fundamental problem, though, is scarcity. We cannot accommodate everyone in the room who might have an interest in a particularly important hearing. So we have to “sell” entry. We can either allow people to use their time (standing in line) to bid for seats, or we can auction seats for money. The former seems fairer, because all citizens seemingly start with equal endowments of time. But is a single mother with a high-pressure job and three young children as equally endowed with spare time as a student on summer vacation? And is society better off if she, the chief legal counsel for a large corporation, spends much of her time standing in line?
Whether it is better to sell entry tickets for time or for money thus depends on what we hope to achieve. If we want to increase society’s productive efficiency, people’s willingness to pay with money is a reasonable indicator of how much they will gain if they have access to the hearing. Auctioning seats for money makes sense — the lawyer contributes more to society by preparing briefs than by standing in line.
Another interesting aspect is the karmic one..used in Islam as blood money. You kill a person and that karma is removed by paying a monetary equivalent of the karmis or legal debt. Eg legally 15 years imprisonment for murder..15×100000 = 1500000 USD where 100000 is the amount the murdere earns a year. With some deductions that is blood money. There is the concept og Guru Dakshina.. payment to teacher for their having taught the student. This debt is in modern times monetarised. Researchers should come to india and meet the more confusing arguments on all this. It is a good way to develop your mind.
Overseas cues to drive the market but limited upside
A positive week for the markets saw volatility in a narrow band with Nifty gaining about 115 points to close at 5216, a gain of about 2.25 pct. The midcaps and small caps outperformed the frontline stocks indicating retail interest.
FIIs continued with their buying spree lapping up about US$ 535 million worth of stocks. The new finance minister Palaniappan Chidambaram was given a thumbs up but expectations of any radical move are low especially after the disappointment from Prime Minister Manmohan Singh in the last fortnight.
The Reserve Bank of India left the CRR and repo rates unchanged but reduced the SLR by 100 bps. The India Meteorological Department (IMD) hinted at a “drought-like” situation as drought can be defined only after the season ends. It is expected that rainfall across the country in August and September will be below normal. This too was taken in the stride by the markets as this situation was building up for a while.
As the industrial sector was coming to terms with the Manesar violence, which questioned India’s image of offering a business friendly environment, we had the worst power failure in post-independent India with the northern grid collapsing. It wasn’t limited to Monday and we saw a repeat on Tuesday, exposing the shoddy state of India’s infrastructure. Our industrial sector seems to be having a bad concoction of a non-performing government, labour uprising in the industrial environment and a failing infrastructure but we still grin and bear it.
The manufacturing PMI fell from 55 to 52.9, the biggest fall since September last year. Exports in June fell 5.45 pct but the saving grace was the larger-than-expected fall in imports by 13.46 pct which helped narrow the trade deficit to about $ 10.3 bln.
When hopes fade on the domestic front, market men are forced to look overseas for cues. The ECB kept the rates unchanged but hope from Fed hasn’t dimmed despite US job data of non-farm payrolls rising to 163,000 against an expectation of 95,000. The jobless rate increased to 8.3 pct, showing that more people are giving up their search for work. The Fed meeting on September 12/13 would be crucial for further easing and stimulus.
Spain signalled that it would consider seeking a sovereign bailout by responding to a conditional offer of intervention from ECB. This was another reason for the international markets to rally on Friday as borrowing costs in Italy and Spain fell. Most of the global markets closed the week on a positive note with gains of over 2 pct except Nikkei which was flat.
Why the RBI preferred an SLR cut
(The views expressed in this column are the author’s own and do not represent those of Reuters)
The first quarter review of monetary policy did not create any ripples. The stock market remained flat and investors and consumers showed little interest. That was because RBI Governor Duvvuri Subbarao had made enough noise earlier that the time was not right and conditions were not suitable for a rate cut.
Time is not right simply because the original cause for the increase in the rate still persists. Inflation is what the RBI had set out to correct. Even in June, it was well over 7 percent and would quite likely scale up further with the monsoon being late and irregular and consequently agricultural production likely to drop.
The RBI did not have to wait for two and a half years to realise that repo is not really the solution to inflation. The RBI had targeted repo because the interest rate that the banks charge remains above the inflation rate. The real rate of interest — as the difference between the two is called — has to be positive to ensure that people do not give up their savings habit and debtors are not subsidised by creditors.
There was a more relevant reason why the RBI did not cut the repo rate. Like a compulsive spendthrift, the government has been borrowing hugely to cover the deficit between income and expenditure. This borrowing by the government can itself push up the rate of interest for the private sector even if the RBI volunteers to cut the repo.
The cut in SLR has to be seen in that context. Subbarao is keen to ensure that “liquidity pressures do not constrain the flow of credit to the productive sectors of the economy”. That also implies that the government should not have easy access to funds to cover its bloating budget deficit.
The RBI could have reduced CRR but preferred to reduce SLR. The first would have meant that commercial banks would have got additional liquidity free of cost. If liquidity alone was the issue, the RBI can replenish it using open market operations. The second would mean that banks will shift their portfolio in favour of the private sector against the government or to the more productive from the less productive sector. That is the real stance of the monetary policy.
Not so easy for India to come out of the dark
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Many words have been used to describe the power outages that put half of India in the dark this week: embarrassing, catastrophic, the worst the world has seen. While all of these may be true, the blackout also embodied the dire situation the country could be headed to without the necessary reforms to modernise its economic infrastructure. To be sure, it is not a lack of vision that would lead India to similar potential disasters in the future, but a lack of political will.
The victory of Pranab Mukherjee in the presidential election changes nothing in the reform landscape: the question remains whether the government is willing and able to accomplish reforms to revive growth. Given the politics that lie ahead with 10 state elections in 2013, it is more likely that only the low-hanging fruits will be tackled over the coming months. The big-ticket items will likely have to wait until after the 2014 general elections. The bad news is that these smaller reforms will not be enough to pull the economy from the doldrums. The good news is that from the bottom, there is nowhere to go but up.
LET’S ACKNOWLEDGE THE TRUTH
The fact is that India is not fulfilling its potential due to the absence of reforms. In my view, delays in some of the major items are the reason GDP growth has fallen below the 2008-2009 crisis levels. The lack of progress has also caused drastic mood swings among financial investors.
The pressure on the government to act is increasing, due not only to deteriorating numbers but also to the threat to the government’s credibility and sovereign credit rating. With Standard & Poor’s giving India a negative rating outlook, the country is flirting with junk status. Promisingly, the incumbent Congress party has acknowledged that without reforms, its chances of winning the 2014 elections would dwindle. But while the party’s spirit is willing, its flesh may be too weak to overcome the hurdles — in many cases, the states and the allies they represent — to the kinds of reforms that would attract investment and usher the economy back to the promised land of 7.5 pct to 8 pct growth.
REALITY CHECK: THE TOUGH ONES
Hartmut,
Thanks for an interesting article. As one who visited India many yrs ago I would say that I have been delighted to see the growth of India economically.
Major power outages are disappointing and even dangerous especially for hospitals etc but are inevitable in a Developing country.
I found the Indian people to be a wonderful people and hope they can get back on track to growth and prosperity.
Namaste!
