Or, the line between a pretty standard EM problem and those of a uniquely enormous democracy heading into an election which happens to suffer from many of those standard EM issues.
First, the negative loopiness from Goldman’s Tushar Poddar:
Contextualizing the channels of transmission in India’s case—its large current account deficit and external funding needs have led to the INR depreciating by 18% against the USD since early May as capital inflows have slowed. This induced the RBI to raise short-end rates by 300bp on July 15. The increase in short-end rates is impacting the banking sector—both in terms of higher costs of funding and losses on their investment portfolios. Banks may reduce credit to the private sector as a result.
The corporate sector, which had already scaled back on investment activity, may retrench further. GDP growth slowed to 4.4% in Q2 2013, and we see risks that it could slow further as a result. A slowdown in growth is already affecting India’s economy through multiple channels. It is leading to weaker tax revenue growth—which fell to 6.5% yoy in April-July compared to 21% yoy over the same period in FY13. A slowdown can also lead to a rise in non-performing loans in the banking system. Our India Banks team expects impaired assets to rise by 30% in FY14E from the current level of 9.1% of total loans at end-March 2013. In a scenario that assumes a very aggressive 50% write-off of impaired assets, with the latter reaching 12% of total loans, the fiscal costs of recapitalization could be 3% of GDP. Finally, the weaker growth could lead to a further slowdown in capital inflows and affect funding available to Indian companies. This may be an area of concern as short-term borrowings by companies, largely trade-related credit, stood at US$87bn as of March 2013, while the total external debt of companies was US$145bn. Read More
The corporate sector has blamed the economic gloom — evident in the recent run of factory output numbers — on the slow pace of economic reforms.In an interview with Business Line,global consultancy firm, KPMG’s Indian operations’ chief executive officer, Richard Rekhy shares his views on how a course correction can be effected to put the economy back on rails.
Excerpts from the interview:
How does a global consultancy firm like yours view the Indian economy?
The Indian economy truly opened up, post-2001, and has been growing at a rapid pace since then. Our processes could not keep pace with the growth. So, today, the scams being unearthed are a manifestation of regulations not keeping pace with growth. The need of the hour is enforcement of these regulations to iron out any discrepancies.
Global slowdown and high inflation are responsible for this decelerated growth, which has also impacted exports significantly.
Secondly, the Government did not come out with regulatory reforms which could have pepped up the economy. The inefficiency of the law enforcing machinery acts as an obstacle to India’s growth story. Post the 2008 financial crisis, there has been an aberration in economic growth.
The third point is the inconsistency in tax regulations, retrospective amendments and non-uniformity of the tax structure. Fourthly, the entire sentiment is down — inflation and the current account deficit have limited the monetary policy tools available. Read More
-S&P still has a negative outlook on India’s sovereign rating. If GDP growth is not revived, India risks falling into a cycle of low growth and high debt. Regulations such as the Statutory Liquidity Ratio (SLR), which requires the banking system to invest 23% of its net demand and time liabilities (NDTLs) in government securities, provide an assured source of funding for government debt. Almost 98% of government debt is funded domestically.
-Thus, while a rating downgrade would not affect the funding of government debt, it would become more expensive. The corporate sector could suffer more as raising debt became both challenging and expensive.
Shinzo Abe’s expansionary economic policies may be bolstering Japan’s global manufacturing groups, but the country’s biggest banks are suffering an Abenomics ordeal.
The three biggest Japanese lenders – Mitsubishi UFJ, Mizuho and Sumitomo Mitsui – on Wednesday forecast lower profits for the financial year to next March, as the aggressive monetary easing promoted by the prime minister and his central bank governor, Haruhiko Kuroda, pushes them out of the relatively lucrative government bond (JGB) market.
Banks have for years counted on income from JGB trading to supplement the poorly paid business of lending to companies. Japan’s corporate sector is flush with cash and – given the country’s weak growth – has little need for new factories or equipment in any case. When companies do turn to banks for funds, it is at rates so low as to make the loans barely profitable. Read More
A Parliamentary panel on Tuesday recommended that the controversial 26 per cent profit sharing clause in the Mining Bill be dropped from the proposed legislation. The move, if accepted by the Government, would go a long way in reducing the financial burden on various mining companies like Coal India Ltd (CIL).
The Parliamentary Standing Committee on Coal and Steel in its report on the Mines & Minerals (Regulation and Development) Bill 2011 or MMDR Bill, which was tabled in Parliament, suggested that the clause – under which coal and lignite companies are to share their profits from mining activities with local communities affected by their operations – be removed and instead the companies should contribute an amount equal to the royalty paid to state governments during the fiscal.
“The Committee recommends that in case of coal and lignite, the mechanism for payment to District Mineral Foundation on the basis of royalty paid during the financial year may be worked out instead of an amount equal to 26 per cent of the profit and amendment be made in the relevant Clause as proposed by the Ministry of Coal,” the panel said in response to the much in the news clause, which had also created a lot of resentment within the corporate sector. Read More
Europe’s nonfinancial companies have over €1 trillion on their balance sheets in cash and equivalents (as measured over the last 12 months to Jan. 10, 2013). In real terms – – adjusted for EU-27 inflation – – the aggregate cash balance has retreated from 2010’s peak (€1,056bn). This is still 21% higher than the cyclical trough in 2008 and, at face value, a €1 trillion cash-pile suggests significant financial firepower at the disposal of Europe’s corporate sector.
Using Standard & Poor’s Capital IQ data analysts calculated [pdf] aggregate cash trends (see chart 1) for Europe’s 1,000 largest nonfinancial companies in terms of total debt outstanding – – a universe they call the Europe Debt 1000. This includes both publically listed companies and private companies with public debt, and constituents are recalibrated annually. Read More
The Reserve Bank should give preference to the non-corporate sector for new bank licences, Prime Minister’s Economic Advisory Council ChairmanC Rangarajan said.
“It is possible for the Reserve Bank to start with initially non-corporate business and find out whether there are suitable applicants and thereafter proceed to look at the other applicants,” he said in an interview.
The RBI is in the process of finalising the guidelines for giving new bank licences after Parliament approved Banking Laws (Amendment) Bill last month.
The central bank, Rangarajan said, “should look at various types of financial institutions that are available currently and decide”.
“…. many of the strong private sector banks today have been at one time or other in the financial system. They can look at it first and look at the other later on,” he said. Read More
Rating agency Moody’s today said Indian economy is expected to have grown by little more than 5.5 per cent in last quarter, and an initial spike in investor sentiment after recent reforms has faded and the “reality of India’s deep-seated structural problems” has begun to set in.
The reforms proposed by the government may help reduce thekey risks facing the economy but cannot lift the near-term outlook, Moody’s said, while adding that the economy is growing well below its long-term potential.
It, however, said that the growth rate could be near the bottom of its current downward cycle.
The country’s GDP numbers for July-September quarter is scheduled to be announced next week on November 30.
Moody’s said that the growth rate for that quarter could be “a little more than 5.5 per cent year-on-year, roughly the same as in the first two quarters (of calendar year 2012) but substantially below where GDP was 12 months ago.” Read More
India’s yawning trade deficit is not a separate problem from the government’s budget shortfall. They are two sides of the same coin. The connection between them becomes evident when one looks at the current account gap not as the excess of imports over exports, but as the difference between the country’s investment and savings.
The twin problems started in February 2008, when New Delhi undermined a six-year process of deficit reduction by announcing a $15-billion (Rs 60,000 crore) farm debt waiver. That blunder, compounded by several other acts of fiscal irresponsibility, had a pernicious effect on the nation’s savings-investment dynamics.
Fiscal profligacy encouraged households to seek cover in imported gold as an inflation hedge. A quintupling of household investment in “valuables” between financial years 2008 and 2012 shrank the pool of financial savings available to the domestic corporate sector, which was unable to maintain the breakneck pace at which it had been issuing debt equity and debt securities.
That, in turn, made Indian companies increasingly reliant on foreigners’ money to finish projects already underway. The current account deficit shot up to 4.2 per cent of GDP in the last financial year. In the last two years, India’s stock of foreign debt has shot up by 32 per cent even as the monetary authority’s foreign currency reserves have fallen. Read More
Country’s external debt rose by USD 39.9 billion during the one-year period ending March 2012 to USD 345.8 billion on account of higher commercial borrowings and rise in non-resident Indian deposit.
India’s external debt stock at end-March 2012 stood at USD 345.8 billion, increasing by USD 39.9 billion (13.0 per cent), the finance ministry said in a statement.
At the end of March 2011, the external debt, which indicates liability of residents of a country to non-residents, was USD 305.9 billion.
“The rise could be attributed mainly to increase in commercial borrowings, short-term debt, and non-resident Indian deposits,” the statement added.
At the end of March, the share of commercial borrowings in total external debt stock stood at 30.2 per cent, followed by short-term debt (22.6 per cent), NRI deposits (16.9 per cent) and multilateral debt (14.6 per cent).
“Though the rising shares of components namely ECB are in line with the broad policy orientation of the Indian economy (that has emphasised attracting foreign savings into the economy over the past few decades), these developments signal heightened exposure of the domestic corporate sector to external shocks, including adverse exchange rate movements,” the statement said. Read More