Pressure on the central bank and companies to change and on the
government for tax cuts and freebies
The mean-spirited partisanship that marked 2018 is likely to linger in
the New Year. Tensions between various stakeholders are set to get worse before
they are resolved. The flash points between the Reserve Bank of India and the
finance ministry such as the degree of co-operation among career bankers and
outsiders on the board, the extent of autonomy to target inflation, the ratio
of appropriate reserves and the quantum of dividend are too contentious to get
sorted out in the short term. Lots of blood will be spilled before satisfactory
conclusions are reached. For all the noise, one thing is sure. The profile of
the arbitrator of the cost and availability of money is likely to change as the
wise men at the helm become reactive rather than proactive as more and more of their
moves get dictated by the actions of the US Federal Reserve and oil prices.
Liquidity challenges due to domestic developments will be managed through money
market interventions rather than rate adjustments. With efforts to shape up the slothful public sector lenders proving
long-drawn and painful, pressure to relax the recognition of bad loans will intensify
as policy makers view them as spigots to kick-start the economy and underwrite
populist schemes. Due to restricted powers to control them, private banks will
bear the weight of the monetary authority’s attention. Whether it is
willing to be pushed back on how much equity promoters should control will
determine how serious it is in protecting its turf.
The usefulness of fiscal discipline will find less and less backers in
the run-up to general polls, and with plenty of reasons. How corporate and
individual tax cuts in the US propelled the economy and the promise to waive
farm loans led to a change in government in three states at the end of the year
will be cited to eject textbook prescriptions. Rectitude will be rejected in
favor of pump-priming. Higher minimum support prices for
agriculture produce will be supplemented by a bump in guaranteed rural
employment wages and last-mile electricity connectivity will be complemented by
free power. On the one hand, legitimizing of bankruptcy will lead to new owners
and release of pending dues of creditors. On the other side,
the wave of inter-PSU divestments in the name of consolidation is likely to
rise rather than fall to beat volatile markets. What can be safely ruled out is
a privatization spree after the sale of one asset that there was consensus on
complete government withdrawal from ownership got grounded before take-off. The
tightrope walk to appear not selling the family jewels cheap and staunch the
bleeding of useless behemoths will be played in the public as well as the
private sectors. The dilemma will be how to keep prices of natural resources
such as telecom and natural gas low and encourage investment and expand the
ambitious air network reach without cutting tax on aviation turbine
fuel. The central bank will have its own Hamlet moment: to use the
misleading food-laden CPI or core industry-heavy WPI that captures economic
activity as a peg to hang its monetary policy because the trajectory of the two
does not always run parallel.
The underlying rivalry to become market leader for better pricing cannot
to be wished away in 2019 even if old competitors are replaced by new ones,
particularly in the private banking space, where the race is to dive into a
small pool of highly rated corporate borrowers. The change in investors’ taste
to wholesale credit provider will see bigger NBFCs shift their reliance to
bonds from short-term commercial paper, opening up access to varying tenure and
quality of debt just as companies will step up buybacks and dividends to shore
up valuations following the departure of foreign investors in search of higher
yields. Collapse of important institutions, enhanced regulatory surveillance
and increased shareholder activism will leave behind a basket of better quality
paper as the crises will trigger mergers and acquisitions. It will encompass industries vulnerable to cycles and tight control such as banks, cement,
telecom and steel as well as defensives including consumer goods and
pharmaceuticals eager to be first off the shelf and for a niche perch. The
side-pocketing of bad assets by mutual funds stemming from the IL&FS defaults
will not be an isolated event as regulations will improve to address systemic
weaknesses. The definition of too-big-to-fail will enlarge to encompass side actors.
The rural consumption and infrastructure themes in the election cycle will
leave behind a foundation to build on even after the end of campaigning in a
manner that unrealistic promises will have the potency for somber realization the
day after that there are no shortcuts to prosperity.
-Mohan Sule
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