The home run

The growing presence of mutual funds in the trading ring is making equities vulnerable to domestic turmoil

The increasing influence of mutual funds on stock movements is a welcome counter to the dominance of foreign investors. At the same time, it has given rise to a peculiar set of problems for Indian equities. Domestic funds have to reckon with around Rs 10000 crore of inflows every month. There is urgency for quick results as the difference in the tax rates on long and short-term gains is now just 5 percentage points. The regulatory cap on exposure to stocks implies constant search for new investment themes. The beneficiaries have included companies low on performance but with plenty of hints of great potential. Discoveries have a cascading effect as other investors copy the cues. It took the Securities and Exchange Board of India to dismantle the Ponzi scheme. Increased surveillance and regrouping of stocks as per their market cap rankings triggered a shake-up of portfolios. More than 1,500 small caps lost over half their value and over 100 mid caps between 20% and 50% from their 52-week highs by late October. The bounce-back of these stocks will depend on several factors. Bumper festive-season buying on the back of normal monsoon and fading of the GST roll-out pain will be the short-term signal. The satisfactory completion of the election cycle by end May 2019 will be the medium-term trigger. The second effect of the vote of confidence in mutual funds to create wealth is the lack of panic among retail investors to economic headwinds. A weak rupee is trapping an import-intensive India into a high interest-rate regime. The climbing up of fuel prices has hurt consumption but not the savings habit. The consumer price index has remained nearly flat in the three months to September 2018 though Brent prices rose over 17% to US$ 82.72 a barrel in the two-and-a-half months to end September 2018. The gross savings to GDP ratio has remained constant at around 29% in the last two years to the June 2018 quarter. The surge in SIPs shows no sign of slowing: they grew 52% in September 2018 from a year ago and 13% from April 2018.  The IL&FS crisis has been shrugged off after the government takeover. The smooth transition of Satyam and UTI to normalcy has put to rest for now fears of a blowout.

The third worry is the inability of mutual funds to sway large caps. Most of their expensive discounting stems from the inclusion in various widely-tracked indices, making them indispensable to foreign institutional investors. The pace of their appreciation or decline depends on the volumes of dollars chasing or exiting from them due to issues that affect liquidity rather than any company-related event. After languishing for the first six months of 2018, when mid and small caps were hitting new peaks, the headline indices raced to hit their lifetime highs in August after overseas portfolio managers turned net buyers. The fourth outcome is the comeback of local news in shaping the market. NBFCs were dumped on concerns of asset-liability mismatch despite healthy operational performance of all the front-line players. Their net profit improved 31% and the return on assets 0.3 percentage points to 1.9% in FY 2018. The chatter of how these lenders had occupied the retail loans space untended by PSU banks went silent. In a diametrically opposite strategy, big investors have voted for private banks despite corporate governance issues at most of them.  The Reserve Bank of India has denied extension to bosses of two private banks for hiding bad assets and pulled up two for not diluting their stake.

The fifth fallout of mutual funds being bestowed with the responsibility of outperforming the market all the time is the increasing trend of turning over portfolios to squeeze out maximum value by ejecting slowing stocks and spotting growth opportunities. The 24x7 news cycle that is constantly spewing information has only accelerated the trend. On an average, equity schemes churned 94% of their stocks in September 2018, up from 76% in January 2018. The frequent shuffling of the pack means higher trading charges and diminishing returns. If the growing demand resulted in heightened scrutiny of mid and small caps, the spurt in interest is triggering a close examination of the way mutual funds operate. The crackdown on floating of similar schemes will result in rapid rotation of stock allocation and volatility. Sponsors of asset management companies will be left with little choice but to shift focus to high-frequency portfolio management schemes, whose fees are linked to performance, or encourage passive investing. After equal preference, with Rs 8000-crore subscriptions each in June 2018, it will be interesting if the marked tilt towards active funds in September 2018, after the benchmarks touched their lifetime highs end August 2018, persists after the market's plunge since then.

-Mohan Sule

Passing the buck

The fall of IL&FS is a story of enlisting the private sector to facilitate ease of living without ensuring ease of paying the bill

The mimicking of the Satyam Computer Services model to take over IL&FS is intended to assure the market that the crisis will be contained swiftly. The tech services exporter was sold within four months after the Union government bundled out the discredited board. A finance ministry official has put the bailout timeline for the cash-strapped financier and developer of infrastructure at six to nine months. The improbable feat seems to have succeeded for now. Save for one mutual fund, there was no mass-scale dumping of debt, belying fears of a contagion. Though similarities are sought to be drawn, the two cases are different. The promoter-driven software solutions provider’s problem was not with liquidity but its deployment. The fallout of the collapse was restricted to its stakeholders as was in the case of a non-performing airline and some steel makers. Accountability could be fixed. In contrast, no single institution controlled the resources-hungry showcase of public-private partnership that absolved the government from raising funds for execution and maintenance of bare-bones projects. Lenders include financial institutions, banks, NBFCs and mutual funds. Operations span across geography and involve numerous participants. Despite maintaining an arm’s length, the government is an indirect shareholder. Satyam dressed up earnings to retain a slot among the top three players in the sector. IL&FS’s illiquidity stemmed from pending receivables, resulting in defaults. While the desperation to scale up contributed to Satyam’s demise, the obstacles for IL&FS were not bagging orders but implementation and payment delays.  Handpicked directors being ignored by a founder cooking the books is understandable. What is not is the passive role of two foreign big-ticket investors, a poster-boy for transparency and state-owned entities even as professional managers without skin in the game recklessly piled up short-term debt. The ejected nominees represented government-controlled entities as well as the private sector. The plumbers replacing them are drawn from bureaucracy and deal makers.  

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 If the chief of a mortgage pioneer was penciled to find another home for Satyam, a new-age banker has been entrusted to staunch the bleeding of the IL&FS group, excise the infections and wrap it up in an attractive package. Despite a record of wealth-creation, it will not be out of place to wonder how much time an owner, who is in the midst of reducing his stake by the December 2018 deadline to comply with regulations, can devote to his flagship from an honorific job. Not only that, the issue is of enlisting someone who has been pulled up by the monetary watchdog, for trying to bypass the dilution of his holding by issuing preference shares, to rescue a sinking ship whose corporate governance practices are responsible for the mess it is in. Instead of one enterprise, he will have to reckon with over 300 listed and unlisted subsidiaries, associates and joint ventures with a web of cross-holdings. A company doing generic back-office work is bought for its client roster to expand market share. In contrast, the challenge for the new buyers of assets, floated mostly by special purpose vehicles, is to make them revenue-accretive. Rather than trying to plug the leakage, what is required is disentangling and slicing and dicing of the IL&FS group so that it can be disposed of piecemeal.

More than survival, the preoccupation of the fire-fighters will be to open lines of credit to extinguish the likely redemption pressure. The issue in Satyam was not of de-leverage but of restoring confidence. The Rs 91000-crore liability of IL&FS is a collateral damage of a hybrid monster, created by the government to snag private capital for local body projects, gone out of control. In turn, the policy makers could conveniently shrug off the responsibility to boost tax revenues to support the demand for world-class facilities and, at the same time, not muster courage to make users pay for them. Retail finance companies get assured monthly returns on their assets. Apart from collection of toll over a fixed tenure, other essential but capital-intensive projects such as water treatment do not generate annuity. The one-time payout hinges on release of funds from the sponsor, often municipalities and Central and state undertakings hobbled by the need to provide subsidies and free services. Now that the experiment has backfired, the government has two options. It can take the exposure on its book by subscribing to the NBFC’s bonds. The alternative it to disallow the beneficiaries of the services a free run. Not all the woes of IL&FS are of its making. Its misfortune is being present in a sector that promises ease of living but does not assure ease of paying the bill.       

-Mohan Sule

Against conventions

Investments tracking economic expansion and mimicking institutional investors have to reckon with higher costs

It takes a crisis for investors to realize the uselessness of conventional theories. A track record of expanding revenues and profit, a sound dividend policy, transparency in operations, prompt disclosures, shunning discrimination against the small shareholders, standing out in comparison with peers, good liquidity and presence of institutional investors are high on the checklist. It is rare to find a stock that has all these qualities. Gain in market share is often at the expense of the margins. A low base can push up profit in a year but becomes difficult to sustain going ahead unless debt is taken to grow organically or through acquisition. Cash accumulation creates unease about the longevity of the niche position in the event of technological disruption going ahead. Instead of imparting a sense of security, deployment of cash becomes a concern. Promoter control offers solace about continuity as well as discomfort over sudden change of direction. If foreign and local fund holdings are tracked to validate the correctness of the investment decision, their contradictory behavior during the recent market turmoil has caused confusion rather than resolve the issue of using these big-ticket investors as the guiding pole. Overseas portfolio investors have exited while mutual funds stayed put in stocks. The question is whose actions should be considered a reliable indicator of the outlook for a company.  Investors mimicking the footsteps of institutional investors have to prepare to churn their portfolios along with these leaders. Trading expenses and taxes can eat into the gains.

History is rife with the futility of policy makers trying to shape the movement of liquidity to maintain the growth momentum and at the same time exercise fiscal rectitude. During the Great Depression of the 1930s, the US limited credit and cut down expenditure. It took a decade for the global economy to recover from the risk-aversion. The controls imposed on the surging fund inflows into the Asian Tigers to tame prices of assets triggered the first currency crisis in 1998 after the formation of the WTO to facilitate seamless trade. In contrast, the dot-com boom and bust at the turn of the century resulted in loose monetary policy by the Federal Reserve, clearing the way for the global financial meltdown in 2008. Ironically, the seeds of the present turmoil in the foreign exchange market can be traced to the US central bank embarking on an opposite path of money-tightening. The more the Fed raises rates, the more is the intensity of the flight of funds back to the US, weakening the emerging economies and disheartening those betting on a strong US economy boosting exports and inward investment. The effort of India to discourage imports of non-essential items by raising tariffs is a classic throwback to a bygone era but has the capacity to make indigenous manufacturers attractive. The contrasting step of easing foreign investors’ access to corporate debt is an out-of-the-box move to meet the resources need of a growing economy and at the same time check the fall of the rupee. What it means is that henceforth the problem-solving playbook will be a mixture of traditional and innovative solutions, throwing into disarray the usual preference for companies with FDI over external debt. 

A sprinting economy is known to light the fire of inflation as supply lags demand. Those taking positions to capitalize on the consumption story have to keep in mind the heavy-handedness of the central bank. The obsession of the Reserve Bank of India with heating prices was taken to a new level by former governor Raghuram Rajan. He kept the lending rate at 8% throughout 2014 even though the new peg to benchmark the policy rates, consumer inflation, composed mainly of food items, halved from 8.1% in the year. The Wholesale Price Index, with predominance of the core and manufacturing sectors, was negative in 2015. The repo rate was 7.5%, when the headline CPI was 5.3%, in March 2015. By the time he left a year later, the headline WPI was 1% and CPI 5.2%. Yet, the base rate remained at 6.25%. In the process, growth slumped from 8.8% in the September 2014 quarter to 7.6% two years later. The downside of tracking the GDP to get ready to invest is confronting stocks preparing to sprint being weighed down by higher operating costs. Recent events have also demolished the strategies of buying at dips and picking stocks with tailwinds. Cheap forward valuations have proved illusionary as promising stocks crash-landed not because of sudden transformation in the marketplace but on unexpected corporate governance issues. Attractive trailing discounting becomes deceptive when the company’s problem is not cyclical but arises from misjudging the market.     

Mohan Sule

Trigger-happy

Interest rates, movement of oil and rupee, corporate results, divestment and state polls will influence equities

 After furiously accumulating 6,300 points in the five months to end August 2018 as against 16 months taken to travel the same distance earlier, the equity benchmark seems to be losing stamina. It shed more than 4% in over a fortnight since reaching its life-time high. The US-China impasse on trade tariffs continues. Following Turkey, Venezuela became the second emerging economy to see flight of foreign capital. The fear is of the contagion spreading to more countries. Oil prices rebounded to US$ 79 a barrel and the rupee slipped below 72 a dollar.  Bond yields have crossed 8%, indicating the central bank might have to increase interest rates for the third time after four years in its October policy meet. After the euphoria, there is a sobering realization that the 8.2% expansion in the GDP in the June 2018 quarter over a year ago might not sustain as the spurt was on a low base of 5.7% increase in the June 2017 quarter. Floods in Kerala in August, too, are likely to dent the GDP numbers of Q2 of the fiscal year ending March 2019.  What is striking, though, is the side-way movements of the market. After declining for a number of consecutive trading days, equities bounce back over the next few days, fully or partially erasing the previous losses. There are alternate bouts of selling and buying by both foreign and institutional investors. Those who prefer to sit out during the surge enter on dips. The message from the market is clear: though expensive relative to their trailing earnings, the future of Indian companies is bright. To move up to the next level, there is need for fresh triggers.   

 

 A significant cooling of crude might come after the IPO of oil producer Saudi Aramco, slated anywhere between this year and 2020, is out of the way. Saudi Arabia is pushing for a price beyond US$80 a barrel to get a good discounting for the offering in spite of the Organization of Petroleum Exporting Countries meeting the objective of draining out excess inventories after agreeing to cut output end 2016 for a year and then extending it to end 2018. A barrel had crossed US$ 140 in July 2008. A few months later many US banks collapsed. After falling in reaction to the credit crunch, crude recovered to US$ 100 in 2011 as pump-priming by the US monetary authority opened up the credit pipeline. As many smaller European countries struggled with debt default, prices started slipping in 2013 and plunged by half a year later. Hopefully, the Gulf nations would not want such a situation to repeat as the current level of cutback in output is sufficient to put their economies back on track. Alternatively, a government-induced slowdown in the world’s second-largest economy, China, can soften commodity prices and lift import-intensive economies such as India. Easing of the current account deficit will follow. The second trigger will come from the Federal Reserve if it stays put for the rest of the year, citing contradictory signals from the US economy. Consumer confidence is high but uncertainty arising from tit-for-tat trade barriers has muddied the outlook for American exports. Compensating exporters with subsidies will expand the widening fiscal deficit and derail the booming domestic economy.       

 

Stability in US interest rates will give the Reserve Bank of India flexibility to pause from its money-tightening exercise. Soft consumer prices have enabled it to let the rupee beyond 70 so as to remain competitive. Despite dipping into the reserves, there seems to be no urgency to prop it up to above 65 prevailing at the beginning of the fiscal year. The existing disparity between the interest rates in India and US is quite attractive for dollar inflow into the local capital markets. The Make-in-India campaign is an acknowledgement of the limits of relying on exports to shore up foreign exchange. Instead of higher external borrowing limit for Indian companies, opening up aviation, insurance and multi-brand retail to controlling foreign ownership will prove a powerful magnet for overseas funds. In the short term, the Q2 and Q3 performance will reveal if the resilience of Corporate India in overcoming the disruption of demonetization and implementation of GST extends to circumventing the effects of expensive inputs. Release of more dearness allowance to Central government employees and enhancing the overdraft facility to Rs 10000 for Jan Dhan account-holders should spur urban-shopping just as a normal monsoon and higher farm support prices have provoked rural-buying. Many companies’ volume-push due to reduction in GST is slated to translate into higher margins on pass-through of costs after the cooling period and improved capacity utilization. In between, the beginning of bidding for bankrupt power assets and divestment in PSU cash-guzzlers will boost investor confidence. Later, results of elections to five states will provide clues on the mood of the market.

-Mohan Sule

Strange things

Rupee weakening despite return of foreign investors, growth without discipline and promoters unwilling to let go

The snap decision of electric vehicle pioneer Elon Musk to take Telsa private and then reverse it after a few days is not the only strange thing that has happened of late. The comeback of foreign portfolio investors since July after being net sellers in four of the first six months of the current calendar year to lift the local equity market to lifetime highs is equally jolting. The BSE benchmark took half the time to amass over 2,800 points that it had accumulated in the three months to end June, gaining 27% in the next two months. Their return was despite trade tensions running high and Brent crude quoting above US$77 a barrel, triggering fears of inflation spiraling and current account deficit widening. The Federal Reserve was sending hawkish clues. The Reserve Bank of India and the Bank of England were yet to meet. The hike in their policy rates coincided with the US central bank pausing from its ramp-up cycle beginning August after raising them for seven times in three years from end 2015. The tariff agreement between US and European Union was still to be reached and signs of thaw between the world’s two largest economies to agree to talk were not visible. The buying by overseas investors continued even as there was a flight of capital from fragile Turkey after the US slapped import duty on steel exports. Not that the Indian market was cheap, with the Sensex quoting at a P/E of around 22 end June. Mid and small caps were tumbling on tighter surveillance by the market regulator. The resumption of foreign fund inflow did not offer any support to the rupee. The Indian currency continued to weaken, breaching the 71 mark, along as with those of emerging markets in reaction to the 17% plunge of the Turkish lira in a day mid August.  

More than being satisfied that India is capable of expanding in double digits, as shown by the revised GDP numbers of the UPA years, the question that investors want to ask is why 2006-07 was an exception, with growth plummeting to 6% over the next five years. Adding to the confusion if the figure of over 10% increase in output in the third year of the then regime should be taken at face value is the admission of the official compilers that there was no reliable data. Assumptions have been made. The trajectory was accompanied by 6% average CPI inflation in 2006 from 4.5% in 2005. The combined Center-states fiscal deficit had deteriorated to 23% of GDP from 15% in 2003-04, when the UPA government took office. The spending spree included 43% higher allocation to eight flagship programs over 2005-06. The target for farm credit was enhanced 15%. Importantly, cheap money from the US and Japan was sloshing around. The accelerating net external flows into India’s capital markets nearly tripled to US$20 billion in 2007-08 from the previous year. The inability to sustain the momentum thereafter is a testimony to the transitory nature in the absence of structural reforms. The asset bubbles burst in the second half of 2008. FIIs pulled out US$ 15 billion in 2008-09. In contrast, the first two years of the NDA government were marked by drought. Disruptions due to recall of high-value notes and the roll-out of the goods and services tax followed.

If the exhilarating thought of what India could have been is enough to depress investors so have certain corporate actions. Though the long-serving former boss of HDFC escaped from being ejected from the board by a whisker, the direction by foreign proxy advisors to vote for his ouster should result in introspection. No doubt even international intermediaries participating directly or indirectly in the domestic capital markets should follow standard operating procedures. Yet the firepower against them appears an attempt to divert attention from the crucial issue if the shareholders’ representatives are performing as per expectation. The scarcity of wise men to offer guidance is not a secret. What is not widely known is the number of boards they grace, raising concern of their capacity to pay full attention to the companies they are counselling. Fixed-term tenures and a gap before re-induction are ideas worth exploring. Two of the long-serving directors took the hint and quit. Hopefully, Deepak Parekh, too, will so as not to tarnish his legacy of being a role model for transparency by making way for professionals to run the mortgage lender. That owners are reluctant to let go off is not something new. What dismays is how those who preach corporate governance fall short. It took the Reserve Bank of India to nip Uday Kotak’s bypassing the spirit of reducing his stake in the private sector bank he founded by issuing preference shares instead of ordinary shares. When it comes to Indian promoters, time and again it has been demonstrated that it is selfishness rather than the interest of the small investors that guides their actions.           

-Mohan Sule

Spoilt for choice

On offer are small caps with governance issues, mid caps taking debt to grow and large caps prone to missteps in using cash  

Investors are in an enviable position. There is an array of old economy sectors to explore: The dependable FMCG companies, private banks, NBFCs, automobile assemblers and pharmaceuticals producers. The fading of the disruption due to the recall of high-value notes and roll-out of the goods and services tax and the turning of the commodity cycle riding on the recovery of global economy have put into play oil and gas explorers, refiners, metal miners, capital goods and cement manufacturers, construction companies and providers of housing-related products. PSU banks are getting capital infusion and being empowered to drag defaulters to insolvency. The basket of emerging industries, too, is expanding, with the addition of small lenders, asset management companies and life and non-life insurers. Large-cap laggards are waiting to be picked. Mid and small caps beckon after many shed 30% and more flab. The market regulator has turned hawkish in monitoring stock movements. Policy makers are pump-priming the economy by a series of steps to provoke consumption, particularly in rural areas. GST has widened the tax base as the beauty of input tax credits motivates every tax payer to ensure that his supplier is compliant with the new regime. The arbitrage of price advantage to gain market share is disappearing.    

At the same time, investors today are a pitiable lot. Only about one-third of the more than 3,000- listed stocks trade regularly. Small caps celebrated for spotting niches are also susceptible to headwinds of macro-economic trend reversals, revision of policies and changes in market tastes. The other side of a booming economy that lifts airlines is surging prices of inputs.  The tight grip of the promoters that gives flexibility to change directions without much outside interference can be misused. An e-governance facilitator is now being probed for buying shares of a jeweller. Disclosures can be sketchy. A promising packer of fruit pulp went into a free fall on allegations of divergence of its plan on paper and on ground.  Corporate actions such as bonus shares and stock-splits can be deceptive as there is no outflow of cash. More information is available about mid caps. Their outlook is enticing but can become outdated quickly. An air-conditioner maker unexpectedly skidded in the June 2018 quarter after a `bad summer’. If the upside is survival bias in once-emerging sectors, the downside is sluggish growth. Presence of domestic and foreign institutional investors does offer comfort about their numbers and practices. The concern is the constant need for capital to achieve scale. A builder of airports, a sunrise opportunity, has a debt-to-equity ratio of 46. Ironically, the revenue visibility coincides with the economy heating up and the cost of raw material and money beginning to rise.

Large caps have the strength to withstand economic instability. Yet they are not immune to company-specific issues. Overseas buy of a domestic steel giant that seemed like a masterstroke turned a cash guzzler after the global meltdown. The boards of those that have dispersed ownership are prone to dither over resolving issues that can affect stock prices. In contrast are promoters who do not want to let go and make a mockery of price discovery. The price-to-earnings of a discount retailer with just 20% float is above 100. Opaque acquisitions, bumper compensation packages and accusations of conflict of interest have tarred brands in the private banking and technology services spaces. Usage of reserves becomes a lightning rod. Buybacks to shore up prices result in limiting liquidity and loss of interest among institutional investors. Unrelated diversifications are typical gestures to flank the core activity. The market is unsure if the primary business of tobacco should get more weight or the unevenly performing portfolio of hotels, foods and paper. A petrochemicals conglomerate has been re-rated not because of the cash that its refinery is producing but because of the promise of capital gains from telecom services. A personal-care MNC dependent on rural income is darting from indigenous solutions to frozen desserts to stay attractive. An infrastructure player’s subsidiaries providing financial services and software solutions are getting more interest. The shareholders of a quality private bank are figuring out the next move of the smart founder to dilute stake without causing destruction of wealth: offload shares, enhance the capital or undertake an expensive merger. Those who bought into a legacy LCV and M&HCV owner’s bet on top-of- the-line luxury passenger vehicles to capture China’s growth story are stumped as the local market is showing more potential. When it comes to side-stepping risks, investors do not seem to be spoilt for choice.        

-Mohan Sule

Liquidity injection

Capital infusion into PSU banks, hike in MSP for kharif crops and cut in GST rates lift large caps

A striking feature of the recent rally in large caps that took the benchmarks to lifetime highs is the role of domestic institutional investors. Foreign portfolio investors are reducing their exposure to equities since August 2017. More stocks were liquidated by them than bought in the first six months of the current calendar year after being net buyers in the previous three years. In contrast, mutual funds’ net equity investment was up 30% between January and June over the same period a year ago. As the US and China respond with tit-for-tat import duties, countries are going to look inward. The trend of subsidizing home producers even as import barriers are being pulled up is pushing out overseas investors, who will prefer to operate within their boundaries rather than risk taking money outside. Countries will be left no choice but to manipulate their currencies to achieve growth. How they do so will depend on their orientation. China intends to loosen money supply to depreciate the yuan to make exports attractive even in the face of higher duties. India wants to prop up the rupee to slow down the flight of capital to pay the import bill. The US Federal Reserve has taken a pause from hiking interest rates. A strong dollar will push American exports out of competition.

Mutual funds do not seem unduly perturbed by the macro-economic headwinds. Equity scheme folios have increased 30% and those of exchange traded funds ex-gold 60% over the June 2017 quarter.  Cash has to be deployed. Many large caps had yet to participate in the rally and looked moderately priced compared with their smaller peers. The first wave of June 2018 quarter results underlined their capabilities and outlook. The reorganization of market-cap groupings, as per the Securities and Exchange Board of India mandate, has resulted in the downsizing of several stocks. Schemes whose selection is based on the criterion of market value had to shuffle their portfolios. With the shrinking of availability, the search has intensified for value buys by large-cap funds that had become lighter after many of their picks became mid caps. Big-sized companies are ready to run after spending most of the last year ensuring that their distributors and suppliers become GST-compliant to claim input tax credit. The capital market regulator’s increased surveillance has put off investors from small caps. A portion of the profit booked by exiting from these counters is making its way into large caps. A massive fiscal stimulus has been pumped into the economy. The minimum procurement price of crops that will be sown in April-September will be 50% more than the cost of production. Karnataka is the latest state to waive farm loans, writing off Rs 34000 crore. The depletion of the treasury of states can be expected to be made good by the buoyancy in tax revenues as the rural economy embarks on a spending spree.

With the worry about recovery vanishing, banks will have to make lower provisions and will have more funds to lend. Alongside, the clean-up of books by tightening the bad loan recognition norm, shepherding defaulters to the insolvency process, initiating corrective action against worst-case-scenario banks and infusion of capital by the Union government are shaping up PSU lenders to meet the increased demand for credit. Creating a favorable atmosphere for consumption is the latest round of reduction in the indirect tax rates. In a year since implementation, cement, air-conditioners and large screen televisions are the only mass-based items in the highest slab of 28%. Trends suggest the economy has not only recovered but is picking up momentum, too. The services sector recorded a 21-month high growth in July. The thrust on infrastructure and housing segments has spurred demand for steel (output up nearly 3% end June 2018 over a year ago) and cement (12% increase). Monthly electricity generation is the highest ever. Sales of passenger cars rose 8% to an all-time high of 3.3 million and two-wheelers 16% to cross 20 million. The good response to recent IPOs suggest availability of funds for investing. The tailwinds of the festive season are around the corner. The US-EU accord on tariffs has bolstered hopes of cooling down of the trade-war rhetoric. Oil prices look unlikely to climb up any further, having lost over 5% in July. The downside to the upbeat mood are corporate governance issues that might crop up, surging valuations of large caps and intensification of the panic selling of mid and small caps by retail investors, hurt by the recent brutal correction.

-Mohan Sule