Shailesh J. Mehta School of Management Indian Institute of Technology, Bombay
Finsight The Fortnightly Newsletter
Issue: April 15, 2012
Inside this Issue
Sources:
Ÿ Is the economy headed back to
Ÿ Mint
2-4
Ÿ The Economic Times
Ÿ News of last 2 weeks
5-7
Ÿ The Economist
Ÿ Markets
8-9
Ÿ Knowledge section
10
Ÿ Cartoon of the week
10
Ÿ Campus buzz
11
1991?
Ÿ MoneyControl.com Ÿ Financial Express Ÿ Business Standard Ÿ BusinessLine Ÿ Investopedia.com
F I N S I G H T
Is the Economy Headed Back to 1991? Is Manmohan Singh, who brought India out of a financial tailspin in 1991, now leading the country back into another crisis? Twenty years ago, the current Prime Minister and then-finance minister, explained the urgency of implementing economic reforms in a historic budget speech. At that time, India was nearly bankrupt and on the verge of defaulting on its sovereign debt. The fault lay largely with India's high current account deficit, which can increase levels of foreign debt, and a steep fiscal deficit, or the gap between the government's expenditure and its earnings, Mr. Singh explained. Meanwhile, the country's foreign exchange reserves were not enough to pay its debt. Reforms proposed by Mr. Singh and the government in 1991 got India out of that mess and eventually on to a path of 8%-plus growth in gross domestic product. But in recent months, India's economic picture is again looking grim.For the first time since Lehman Brothers collapsed, the balance of payments fell into the deficit zone. The current account deficit (CAD) - the net position of cross-border trade and services - crossed 4% of the gross domestic products (GDP), when 3% is considered to be the 'lakshman rekha'
These times are eerily similar to the worst the nation faced in more than two decades - at least economically. But the cacophony over the slowing economic growth rate, taxes and corporate profitability is drowning what should have been the hot topic of debate worsening external balances. This is not 1991. Indian economy is many times bigger. Trade is up multiple times. Actors are many and instruments are numerous. However, the impact of the worsening situation will probably be more severe than it was in the gloomiest days since the state occupied the commanding heights of the economy. Here's a look at how key pieces of current economic data compare to where India stood in 1991: Current Account Deficit (The difference between a nation's total exports of goods, services and transfers, and its total imports of them) THEN: The current account deficit was estimated to be “more than 2.5% of gross domestic product in 1990-91,” said Mr. Singh in his speech. He described India's balance of payments situation as “exceedingly difficult.” NOW: For years after the 1991 crises, the Indian government contained the current account deficit to less than 2% of GDP. But in recent years, the deficit has ballooned to 1991-like levels, thanks partly to higher imports and more recently lower exports. For the year ended March 2012, deficit has come out at 4 % of GDP.
Is the Economy Headed Back to 1991? contd.. Fiscal Deficit (The difference between the government's total revenue and its expenditure) THEN: The fiscal deficit is “estimated at more than 8% of GDP in 1990-91,” said Mr. Singh in his speech, calling it “a cause for serious concern.” He said “It should be our objective to progressively reduce the fiscal deficit of the Central Government…and to reduce the current account deficit in the balance of payments.” NOW: The fiscal deficit for the year-ended March 2012 has ballooned to 5.9% of GDP, much higher than the government's targeted 4.6%. The food subsidy bill will add to this burden, say economists, unless the government cuts back on its expenditure proportionately. Inflation THEN: India's wholesale price index, a leading benchmark for inflation, increased 12.1% in the year ended March 31, 1991. Mr. Singh had called it a “serious problem”. He said: “Inflation hurts everybody, more so the poorer segments of our population.” NOW: Since early last year, the Reserve Bank of India has been battling 9% to 10% inflation, by increasing benchmark interest rates 13 times. Still the problem of rising inflation has not subsided with inflation expected around 7.5% for the year ended March 31, 2012.
Foreign Exchange Reserves THEN: In early 1991, India's foreign exchange reserves', comprising foreign currency, bonds and other assets, was around $1.2 billion. “The current level of foreign exchange reserves…would suffice to finance imports for a mere fortnight,” said Mr. Singh. NOW: After the opening up of the economy, foreign direct investment and foreign institutional investment into India's capital markets helped boost India's foreign exchange reserves. They now stand at $292.92 billion, according to the Reserve Bank. Economists say this can cover eight to nine months of India's imports.
Is the Economy Headed Back to 1991? contd.. Indian Rupee THEN: In a bid to improve India's financial situation and attract a loan from the International Monetary Fund, Mr. Singh had instructed the central bank to devalue the rupee. This was done in two steps – first by 9.5% against the U.S. dollar on July 1, 1991, and by another 11% two days later. NOW: In recent months, given India's high current account deficit and muted foreign investment, market forces have pushed the Indian rupee sharply lower against the U.S. dollar. The Indian rupee, which was the best performer in the first two months of the year, has surrendered half the gains and will probably end a loser if overseas fund flows do not improve It's down to 51.29 rupees for one U.S. dollar. Balance of payments, a record of trade in goods, invisible services and capital flows into and out of the country, ended in a deficit of $12.8 billion in the December quarter. The current account deficit, the excess of imports of goods and services over exports, touched $19.4 billion. The nation had to draw down from reserves to meet its consumption- a sign of weakness. To resuscitate India's economy in 1991, Mr. Singh had said: “We must act fast and act boldly.” The same holds true today, to bring India back to a 9% growth track.
News of last 2 weeks Government may allow 49 percent FDI by foreign airlines this week After 16 years, the government is set to again allow foreign airlines to take stakes in Indian carriers later this week. The move is expected to help ailing Indian operators like Kingfisher raise funds. More importantly, it could pave the way for start-up joint ventures. The commerce & industry ministry circulated a Cabinet note seeking comments from other ministries to permit 49% FDI. It is hoping the proposal will go through in its present form as the finance and civil aviation ministries had agreed to it earlier.
So, with or without a formal guarantee the market perceives that state debt has been fully backed," said Gokarn. Because of this, states with weak fiscal condition don't pay much premium compared to those with strong fiscal conditions, he added. Asian Development Bank projects 7% GDP growth for current fiscal India's economy is likely to remain sluggish this fiscal and pick up momentum only in 2013-14, the Asian Development Bank has said, urging the government to fast-track reforms and address constraints that have held back investments.
Plug loopholes to boost tax revenue: Pranab Mukherjee Finance Minister Pranab Mukherjee on Sunday advised experts to plug loopholes in the taxation laws to ensure that the government got its due share of revenue and to curb avoidance. RBI tells mkts to price state bonds on financial health The Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Friday said states with weaker finances are able to raise cheaper funds due to the market perception that state debt is sovereign-guaranteed. There was a need to bring about formal institutional fiscal discipline, he said. "State government debt is apparently implicitly guaranteed by the sovereign.
Though the bank's forecast lags the government's expectation of 7.6% growth in the current fiscal, the report warns that even this projection is subject to risks such as deterioration in the Eurozone, poor monsoon, fiscal slippage and a continued policy logjam.
News of last 2 weeks continued... Direct Tax Code to roll by next year, says Pranab Mukherjee Union Finance Minister Pranab Mukherjee on Saturday said that the long-awaited Direct Tax Code (DTC) would be rolled out from next year.
The finance minister further said the government would be forced to cut subsidies and added that they would not cut subsidies in food. DTC intends to cut tax rates to bring more people and companies under the tax net, phase out profit-linked exemptions for companies and replace them with investmentlinked incentives. Independent directors question IOC, BPCL, HPCL on selling fuel at a loss Independent directors are increasingly asking the boards of state oil companies why they have not raised petrol prices for months to cut losses even though the Cabinet has granted them the freedom to price the fuel. Executives at oil companies said the pressure was mounting. Petrol prices need to be raised by about Rs 9 per litre to bring them on par with international rates. But oil ministry officials say the government would not allow such a steep hike at a time prices of food items and vegetables are soaring. They expect its price to go up by a maximum of Rs 5 per litre.
World Bank chief backs India's tax proposals Even as Finance Minister Pranab Mukherjee faces flak from corporates at home and abroad on his budget proposal to tax Vodafone-type deals through retrospective amendment, World Bank president Robert Zoellick sought to side with the government saying India wanted the company to pay tax at some place. He also reasoned that investors must give some time to the government to explain the details. Among other tax proposals aimed at plugging tax evasion, the budget for 2012-13 had proposed amending the relevant provisions in the Income Tax Act with retrospective effect so as to bring capital gains through Vodafone-type merger and acquisition deals under the tax net. Food Bill: Govt planning to cover 67% of population for benefit With delay in socio-economic caste census, the government is planning to cover 67 per cent of population for the benefit of subsidised foodgrain under the proposed food security law. According to highly placed sources, the UPA government wants to implement the proposed Food Security law by the end of this year as the country has o ve r f l o w i n g f o o d g r a i n s stocks.
News of last 2 weeks continued... Dhanlaxmi Bank plans to shut 30 branches, appoint deputy CEO The Thrissur-based Dhanlaxmi Bank is planning to shut 30 branches in key metros, including Mumbai and Delhi, and it may elevate a key official to the post of deputy chief executive officer.
The bank's network covers 275 branches and 401 ATMs over 140 centers in 14 states. The downsizing is a part of the r e v i va l p l a n s u b m i t t e d b y P G Jayakumar, MD and CEO, to the bank's board on March 28. Some of the branches operate in high-cost areas and the bank does not want to keep them open. Industrial output grows 4.1% in Feb...IIP for Jan. revised to 1.1% India's industrial production growth accelerated in February compared to January, as the Government scaled down its preliminary estimate for the first month of 2012 citing error in sugar output data from the Food Ministry. The combined output of factories, mines and power utilities, as measured by the index of industrial production (IIP), grew by 4.1% in February as against 1.1% in January. India seen more vulnerable to external shocks as BoP worsens In an indication of growing pressure on the external sector, the Reserve Bank of
India (RBI) disclosed that the current account deficit of the balance of payments (BoP) had risen to 4.3% of gross domestic product (GDP) at the end of the
t h i r d q u a r t e r e n d e d December—compared with 2.3% in the same period in the previous fiscal.For the first time since 2008-09, capital inflows were unable to finance the current account deficit, forcing a drawdown of foreign exchange reserves by nearly $13 billion Coal India ordered to sign FSAs In a move that may not go down well with Coal India’s second largest investor after the Government of India, The Children’s Investment Fund (TCI), the government has issued the Presidential Directive to Coal India for signing of Fuel Supply Agreements, reports said.
The supply aggrements will be signed to help increase electricity generation capacity and cut blackouts.Coal India would be penalised for supply below 80% of the committed quantity to local power companies and incentivised for supply of over 90% of the quantity.
Markets The market fell last week after a dip in India's industrial growth, weak global markets and a massive earthquake in Indonesia that triggered tsunami fears in the Asian region, including India, dampened investor sentiment. Trading was volatile throughout the week. The Sensex fell 391.51 points or 2.24% to 17,094.51 in the week ended Friday, 13 April 2012. The S&P CNX Nifty fell 115.45 points or 2.17% to 5,207.45.The BSE Mid-Cap index fell 2.10% and the BSE Small-Cap index fell 0.67%. Both these indices outperformed the Sensex. The week ended Wed, 4 April 2012 saw BSE Sensex rose 81.82 points or 0.47% to settle at 17,486.02 in the and S&P CNX Nifty rose 27.35 points or 0.51% to 5,322.90. Foreign institutional investors (FIIs) bought shares worth net Rs 137.90 crore in April 2012 so far (till 11 April 2012). FIIs have bought shares worth net Rs 44088.60 crore in calendar 2012 so far (till 11 April 2012). Currencies:The rupee logged its second straight NIFTY weekly loss in the new fiscal year that began on April 1, giving up most of its intraday gains on Friday, dragged by a sharp fall in local shares and strong dollar demand from oil importers. The rupee ended at 51.3050 to the dollar and 67.08 against Euro. In the week, the rupee fell 0.5% taking its retreat from the 2012 peak of 48.60 to 5.3%, Thomson Reuters data showed. Key Highlights: 타 Industrial production rose by a smallerthan-expected 4.1% in February 2012, with the government also sharply revising downward the industrial production growth for January 2012 citing wrong sugar output data. Industrial production growth for January was revised downward to 1.14% from the 6.8% expansion reported earlier. 타 Manufacturing output, which has a 75.5% weight in the index of industrial production, rose 4% from a year earlier in February. It had risen a revised 1.4% on year in January compared with 8.5% reported earlier. 타 IT bellwether Infosys was the top Sensex
loser last week. It tumbled 15.69% to Rs
2,403.30. The company announced before market hours on Friday, 13 April 2012, that as per International Financial Reporting Standards (IFRS) its consolidated net profit after tax fell 2.4% to Rs 2316 crore on 4.8% decline in revenue to Rs 8852 crore in Q4 March 2012 over Q3 December 2011. Earnings per share (EPS) declined 2.3% to Rs 40.54 in Q4 March 2012 over Q3 December 2011.Its guidance of 8-10 growth in dollar revenue for the next fiscal year missed the market's estimates. The year ahead looks challenging for the IT services industry, with slow recovery in the global markets, said S. D. Shibulal, CEO and Managing Director.
Markets continued... Key Highlights: Ÿ There is a speculation that the Reserve Bank of India (RBI) will cut its key policy rate at its monetary policy review early next week to spur economic growth after the latest data showed that industrial production grew by lower-thanexpected 4.1% in February 2012. Ÿ India's wholesale price inflation rate likely slowed marginally in March as easing price pressures from non-food items offset persistently high food and fuel costs, a Reuters poll showed. The median consensus from a survey of 30
SENSEX
economists pinned expectations for headline inflation at 6.70 percent for March from a year ago, under the higher-than-expected 6.95 percent recorded in February. Ÿ India is expected to grow at 6.1 percent in year 2012, similar to the pace recorded in the fourth quarter of 2011, according to the Ernst & Young's quarterly Rapid Growth Markets Forecast (RGMF). Growth should be picking up in H2, 2012, provided the global economy does not experience a further shock. Commodities: The most-active gold for June delivery on the Multi Commodity Exchange (MCX) was 0.17 percent higher at Rs 28,791 per 10 grams, after hitting a high of Rs 28,815 on Feb 29.
Ÿ Akshaya Tritiya, on April 24, is expected to boost the Indian physical demand. But in India
many gold dealers are protesting over the recent increase in gold import duties as physical gold demand remains low. Recently Indian government has doubled the import duty of gold. But it is expected that demand will pick up in near term. Ÿ Silver May 12 contract was up by 1.82% to Rs 56994.00 per kg Ÿ Crude oil April 12 contract was up by 0.34% to Rs 5299.00 per barrel while Natural Gas April 12 contract was down by 5.87% to Rs 102.60 per MMBTU. Global Markets: Ÿ Weaker-than-expected data showed China's economy grew at its slowest pace in nearly three years and no signs of fresh stimulus. Ÿ Adding to investor concerns, Spain's benchmark government bond yield jumped above 5.9% after data showed Spanish banks borrowed heavily from the European Central Bank in March. Ÿ The Dow Jones industrial average closed at 12,849.59 and Nasdaq Composite Index at 3,011.33.US data showed consumer sentiment slipping modestly in early April as higher gasoline prices hit household budgets even as optimism over the economic outlook lifted consumers expectations. Ÿ Eyes will also be on the outcome of the first round of the French presidential election on April 22, and March data on the health of US retail sales and industrial production.
Knowledge Section 타 Daisy Chain : A group of unscrupulous
investors who, practicing a kind of fictitious trading or wash selling, artificially inflate the price of a security so that they sell it at a profit. Price manipulation is typically very difficult in stocks with heavy volumes, so the stocks with low liquidity are much more susceptible to daisy chains. 타 Staple Thesis : A theory of economic growth that emphasizes the role traditional commodities, or staples, play in the shaping of a resource-rich economy. The staple thesis was created by Canadian economic historian Harold Innis and economist W.A Mackintosh as an explanation for how the pattern of settlement and economic development of
Cartoon of the week
Canada was influenced by the exploitation and export of natural resources. Though its original purpose was to model Canada's historical economic evolution, the staple thesis can be applied to any country with a successful, export-heavy economy. 타 Scalping : A trading strategy that attempts to make many profits on small price changes. Traders who implement this strategy will place anywhere from 10 to a couple hundred trades in a single day in the belief that small moves in stock price are easier to catch than large ones.
Campus Buzz Mr. Jayendra Nayak, Managing Director and Country Head, Morgan Stanley India, since April 2010 visited SJMSOM on 13th April 2012 and enlightened students with his dialogue on ‘Can Indian Banks Innovate?� He started out by describing the change in the Indian banking sector over the last 15 years. Most notable has been the entry of private sector players which have captured a large chunk of the market in a short amount of time. He also tied the growth of the sector to the growth of the economy. For both the developing economies of
India and China, the ratio of non-working to working people has steadily decreased. In line with this decrease, the savings rate has steadily increased. China, in particular, has been quick to take advantage of this fact. He pointed out that this phenomenon has occurred due to changing demographics of both countries. As a result, India can look forward to enjoying this for another 25 years while China will have to start facing the inevitable downward slope. He highlighted the fact that Indian banking products are less complex in comparison to developed markets. He then went on to talk about the need for innovation in new products which
should be propelled by the shifts in the sector towards securitized products, bond trading and fixed income derivatives and project finance. He also touched upon principle based regulation and regulatory oversight to cap systemic risks. Coming to the innovation in process redesign, he noted that Indian companies have fared well in this regard. He emphasized on the connection between regulation and innovation. In India, regulation is generally conservative to new product innovation while fairly liberal on process and distribution innovation. In India, the market is structurally under penetrated which can be a good thing as it provides an imperative for growth. Assets will continue to shift towards the private sector in the coming years. He also put forth the point that centralization in public sector is less than that of the private sector. Finally, he talked about the new trends in distribution efficiencies such as relationship managers for the mass affluent. The private sector has also appointed or outsourced a low cost sales force to target the masses for simple products like issue of credit cards, debit cards and cash management. He noted that the public sector in India has been very reluctant to outsource while the foreign banks in India have no interest in the mass sector at all. With this, he concluded a very interesting and informative session. The floor was opened for questions, prompting interesting discussions on consumer mentalities and the future of the banking sector. Courtesy: Sindhuja Rao, SJMSOM
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