Jam and bread issues

Watching out for monsoon, deficits, consumer spending, share offerings, health of banks and foreign fund inflows in FY 2017

By Mohan Sule

Have cake, Marie Antoinette, the 18th Century Queen of France, dismissively told her famished subjects. In present times, the Narendra Modi government has suggested Jam to India’s impoverished. The three props of the modern economy— banking, tech and telecom — will be used to transmit funds to zero-balance bank accounts, verified through a unique identity system, of the marginalized population through the mobile platform. Besides claiming to be a corruption-free regime, the NDA government has distinguished itself from the previous dispensation in another area, too: coining catchphrases to simplify complex ideas. Uday, or Uday discom assurance yojna, connotes the dawn of a new era for the sick state electricity boards by transferring 25% of their debt to PSU banks. The passage of the goods and service tax or GST, which will convert India into a unified market ,will be a key event to watch out for in the new fiscal. Many expected and unexpected eruptions will keep investors on their toes. Taking a leaf from the prime minister’s packaging team, some of them have been slapped with easy-to-remember labels:

RAINFALL After two consecutive years of deficit, southwest Rains are expected to be normal this year. Increase in rural consumption and Fall in food inflation are necessary to fuel the gross domestic numbers. BOSS The state of the Bullion, Oil, Steel and Sugar industries capture the best and the worst of an integrated global economy. The appetite of Indians for gold and fuels seem insatiable. Due to import-dependency, prices move as per the state of the world economy and strength of the dollar. Of late, local steel and sugar prices, too, are influenced by external factors such as China's health and Brazil's monsoon. METCON Media and Entertainment players have a significant role in attracting surplus cash. Tech solution providers are play on exports and indicate the well being of the developed economies. Consumer durables and non-durables in the market place. TAP Sometimes they are the flavor of the market, and other times discards. Disruptions, innovations and state interventions are just a few of the dangers lurking for Telecom, Automobile and Pharmaceutical players. Crackdown and disciplinary actions by regulators and policy markers are becoming he norm. Despite the dangers of obsolescence, there is an infectious enthusiasm about their prospects.

LOGIN The digital marketplace boom has brought into the spotlight Logistics companies deployed to distribute online orders. Opening e-commerce to 100% FDI is set to see re-rating of Internet companies, knocked down by recent devaluation by big-ticket investors. BAD Higher provisioning by PSU Banks in the last two quarters of the last fiscal was the emergency surgery ordered by the Reserve Bank of India. With interest rates set to soften as the US Federal Reserve dithers over the health of America and the globe, banks are restructuring Assets and companies Deleveraging as those with cleaned up balance sheets will be in a better position to start afresh and take advantage of the India growth story. RED Foreign portfolio investment was negative for more months than positive in the last fiscal. However, foreign direct investment surged, partly blunting the adverse impact on the Rupee. Exchange reserves were at a record high as the import bill fell in tandem with plunging crude prices. Yet, the Indian currency will dance to the tune of the Dollar, which remains strong irrespective of the intermittent hiccups caused by Fed’s mixed signals on interest rate hikes. IPO The trickle of Initial public offerings last fiscal is expected to turn into a torrent as SMEs from spaces old and new issue shares. PSU stake-selloff will accelerate if the market holds up. There will be Open offers as non-core assets are sold and alliances firmed up, either to take on competition or a backseat. FIT The promise to stick to the Fiscal deficit target of 3.5% of GDP probably assumes a bubbling economy leading to better tax mop-up, disinvestment and auction proceeds and foreign fund flows. All this will ease pressure on Interest rates but might enlarge the consumption of crude. Exports will have to bounce back to keep the Trade deficit manageable.

Post-2008, acronyms did give rise to a bitter taste. Who would want to remember how the crisis in Piigs threatened to upend the globe? And that all but one brick in the Brics edifice has crumbled? However, Modi in his inimitable style has proved that policy pursuits need not to be as dry as bread but can be sweetened to tingle the taste buds.

The golden age

With export prospects dim, time for the RBI to step in to strengthen the rupee to cap the rising imports of the yellow metal

By Mohan Sule

The heat and dust raised by Union Budget 2016-17 is settling down, with the market giving its approval after some hesitation. There is a consensus that the allocation for rural and infrastructure segments will act as a trigger for growth. The focus on the farmer, however, was not at the expense of the investor. The favorable capital gains taxation structure remains intact. A cause of cheer is the resolve to stick to the income-expenditure deficit target for the next fiscal. The implication is that the government will not crowd out private players from the debt market, thereby easing pressure on interest rates. The combo of low cost of money and increase in consumption is surely appetizing. The feeling of relief does not take into account that, besides fiscal deficit, a big difference between the value of imports and exports can influence the availability of money. The current account deficit (Cad) increased to 1.6% of GDP from 0.2% in the six months to September 2015. The euphoria over the expected rate cut, howsoever small, clouds the potency of currency volatility in torpedoing the feel-good factor. Exports in dollars slumped 24% late last calendar year. A crisis was averted as the value of imports, too, was down a third. The oil import bill fell by over half in the year to February 2016, with crude prices down nearly one-third in the period. Though the share of oil in the dollar import bill nearly halved in the nine months to January 2016, that of gold rose, peaking at 15% in August 2015. The price in rupees per 10 gm has risen 13% in the year to March 2016.

The liquidity injection by the European Central Bank and Bank of Japan and loosening of statutory liquidity ratio by the People’s Bank of China are devaluing currencies, prompting investors to seek refuge in gold. The nearly 10% depreciation of the Indian rupee over two years has also resulted in higher domestic gold prices. A weak currency has the might to ignite inflation and prod the central bank to increase interest rates. Economists might be delighted at the narrowing of the Cad, which declined 8.3% in the December 2015 quarter. Yet, just like fiscal deficit, a widening gap suggests a humming economy. An emerging market imports more than it exports to meet growing domestic demand. Also, the age-old concept of self-reliance has been junked, with the world integrating and capital moving to areas offering higher yields. Besides, the global slowdown led by the US initially and by the euro zone and China and Japan of late has brought into focus the dangers of relying on exports for growth. The excess capacities set up to cater to the overseas markets are turning idle and leading to layoffs in China. Wages and recruitment stagnated in the tech sector in India following the 2008 liquidity crunch. What is worrying is exports are not spurting despite the depreciation of the rupee. Apart from the sluggishness in the euro region, China and Japan, the US market’s fragile recovery is complicating the problem.

The unpopular step of hiking excise duty on fuel even as international crude was falling has discouraged copious consumption and added revenues to the treasury. Once the economy gathers speed and oil prices begin to heat up, these duties can gradually be reduced as the void can be filled by buoyant corporate taxes. The market, in fact, should hope for a rate hike by the US Federal Reserve. The fear of the flight of foreign portfolio investors from India accelerating should not cloud the reality that their investment is temporary. From a high soon after Narendra Modi’s victory in May 2014, the inflows fell 70% beginning of 2016 but turned net positive before and after the budget. What is important is foreign direct investment, which touched the highest-ever level since 2000-01 of over US$ 4 billion in the 10 months of 2015-16, probably due to the Make-in-India initiative.The slowdown in the global economy, thus, is proving to be a window of opportunity for India. At the same time, gold has to be made unattractive.Gold sovereign bonds address the urban buyers. Rural consumers view gold as a hedge against bad times. With the budget focused on the agriculture sector, usage of gold is bound to go up. Prices, too, will spurt if the rupee goes down further. The Fed has indicated it might ramp up interest rates twice in the current calendar year. An uptick in economic activity might lead to diversion of some gains into gold. The rupee has to strengthen for gold prices to cool to discourage hoarding. Export prospects, however, are dim. The acquisition of teflon-like characteristics ensures the US dollar remains strong. As such, there might not be much downside of losing the competitive edge even if the Reserve Bank of India steps in to shore up the Indian currency by using some of its record reserves to nip gold imports.