Lone wolves

More than pandemics and political turmoil, governance issues at companies are triggering market backlash

Stock market indices in the US hit record highs even as one of its most important export markets and an important link in its supply chain struggled to contain a pandemic. The toll from coronavirus has exceeded the 774 fatalities compiled by the World Health Organization during the outbreak of Saar in 2003. The magnitude of the impact of quarantining the second largest economy in the world is yet to be quantified by multilateral agencies that were quick to scale down expansion estimates due to the over one-and- half year trade tariff tiff  between the US and China. China’s growth is projected to drop below 5% in the first quarter of the current calendar year from 6% in the fourth quarter last year. Instead of fretting over the looming slowdown, eqity markets gloated over the bumper American corporate performance in December 2019  quarter, till Apple’s earnings warning put a break on the celebrations. There is an underlying optimism that the current crisis will be satisfactorily concluded sooner than the nine months it took to contain Saars after identifying the first patient in November 2002. Besides isolating suspected cases, the inoculation includes monetary and fiscal stimulus within and without China. The federal Reserve held its lending rate unchanged in January despite robust job creation, keeping in mind the uncertainty introduced by the newest threat to global stability.

Not surprisingly, socio-political eruptions are losing potency to influence stock movements. Volatility in prices of assets I sort lived. There were no traces of destruction of wealth, if at all happened during the brief period of the Saars scare, a few months later. The spike in crude prices following the missile strike on two Saudi oil facilities retreated soon after. The killing of a top Iran official in Beirut by the US did not escalate into a full-fledged war. Policy makers around the world are quick to intervene to insulate the economy from any infection. Clashes between opposing forces and protests against economic woes in Latin America and rebels trying to dislodge autocratic governments in Africa are shrugged off as common occurrences.Instead, actions of lone wolves seeking financial dominance are mauling stocks and inflicting long-term damage. George Soros betting against the British pound, the flock of foreign investors pulling out of South East Asia during the currency crisis of the late 90s, collapse of Lehman Brothers under the weight of worthless mortgage- based securities, the UK deciding to exit from the European Union and the US starting a punitive trade war with China have signed even those nations that were merely on the sidelines. These eruptions changed the way the world functioned. Countries have become more circumspect about the kind of capital inflows they will allow. US has cited Huawei as a security threat and banned its participation in its 5G networks. Bilateral and multilateral trade pacts are no longer sacrosanct. The US succeeded in tilting the field in its favor by putting pressure on China to import more farm produce. The UK refused to subsidize weaker European nations through a common currency has balked from joining the regional Comprehensive Economic Partnership and hiked customs duty in the recent budget. Textbook solutions are being thrown out the window. The global risk-aversion after the meltdown of financial institutions in the US was countered by injecting more liquidity.

An exodus of auditors from over 200 mid and small companies in the first seven months of CY 2018  has resulted in a loss of confidence in the space that is yet to be fully restored. The causes of market backlash are now extending beyond insider trading and cooking of the books. Governance is meriting a closer scrutiny. NSE’s IPO plan seems to have gone into cold storage even after the conclusion of Sebi’s probe into preferential trading access to a few participants. Bank stocks are under panic attack due to the reluctance of Vodafone Idea and Bharti Airtel in make provisions for the demand of the Department of Telecommunications to calculate fees based on income even from non-core operations to calculate fees based on income even from non-core operations. The loose oversight by the board of IL & FS has paralyzed the financial services sector  and is hurting consumption even one-and –a half year later. The insolvency and Bankruptcy Code had to be amended to send DHFL to the resolution court. YES Bank’s struggle to shore up capital has spoilt the sentiment for private banks. The lesson for investors, it seems is to not miss the trees for the forest.

---------Mohan Sule

Substance over optics

                                                   

The Union Budget 2020-21 is a vision document that lays the roadmap to a healthy and wealthy India

After the longest ever budget speech by a finance minister, it is time to review the annual exercise that triggers speculation and build up realistic expectation about expenditure, tax and regulatory provisions. If the Economic Survey offering broad solutions based on review of past performance and the Finance Bill with the fine print that has a ground-level impact on the well-being of companies, tax payers and ordinary citizens can be tabled for perusal by the stakeholders later, the main event should be restricted to disclosing the fiscal deficit outlook. The overhaul of the domestic indirect tax structure is now outside the purview of balancing the books as it is revised periodically by the GST Council made up of finance ministers of all states. Scrapping of the dividend distribution tax did not come as a surprise as it was based on the recommendation submitted last year by a task force set up to overhaul the decades old code. A panel headed by Vijay Kelkar in 2002 had suggested doing away with all exemptions for individual tax payers except those on housing in exchange of just three slabs. In fact fiscal year 2019-20 stands out for the number of policy interventions outside the interim budget in February in the run-up to the Lok Sabha polls and in July by the re-elected NDA government. The prominent fiscal measures announced over more than four months till end December included rollback of the increased surcharge on the taxable income of the super-rich, introduction of a competitive corporate tax rate and merging of 10 PSU banks into four besides steps to inject liquidity into the financial sector. What these steady supply of reforms targeted to meet specific short and long term challenges suggests is that the government need not wait for that special day in a year to show its compassionate and resolute face.

Any budget should be scrutinized not only for its intentions but also what has been left unsaid. The budget for 2020-21 lays out a credible roadmap to doubling of farmer’s income in another two years. Support to facilitate storage and transportation of produce will co-exist with production of solar energy to sell to the national grid to generate revenues. The recipe of conventional and path breaking ingredients recognizes the limits of utilizing the mechanism of the minimum support price to increase rural purchasing power. Many initiatives are work in progress. Though they appear piecemeal, these are cogs that have been placed in solving the puzzle of growth. A national logistics policy is crucial if India is to become a global manufacturing and supply chain. An updated education policy is required to churn out an employable workforce. After establishing the importance of national highways, the focus now is on transforming railways from a guzzler of capital to an asset ripe for monetization. Preparation of a charter is an acknowledgement that, apart from responsibility, tax payers have rights too. Hike in customs duty on consumption items primarily produced by the medium and small scale units and review of duty free imports under various free trade agreements are aligned to the India first policy.

The option to forfeit deductions for lower personal tax rates marks the beginning of the gradual phasing out of small savings, with above market rate borrowing costs, as an important resource for capital. Instead big ticket foreign inflows are to be wooed by issuing special government securities, hiking the investment limit in corporate bonds and removing tax on all income earned by sovereign funds from infrastructure. Last-mile electricity connectivity will be meaningless if distributors are bankrupt. Smart meters will reduce pilferage. The flexibility to select the service provider will de- clog the payment pipeline from the source to the end user. Expansion of the national gas grid will wean away consumers from usage of fossil fuels and will supplement the transition of the auto sector to stricter emission norms. The partial take-sale in li is a forerunner to increase the FDI ceiling in the insurance sector from 49%. The emphasis that the deviation from the fiscal deficit target is just 0.5 percentage point means divestment will be a major vehicle to mop up revenues and open the possibility of cuts in peak marginal rates. The projection of 10% nominal GDP growth displays determination to keep inflation at around 4% level considering that the real GDP expansion is expected to be 6-6.5% for the next fiscal year. Retention of long term capital gains tax in the present form conveys the unmistakable message that risk taking is linked to ease of doing business rather than short-term fiscal sops.

------ Mohan Sule