Government's promises will fuel damages

May 14, 2009

In this issue:
» What the exit polls show
» Daiichi is paying a heavy price
» Elections boost India's economy
» YV Reddy's take on infrastructure
» ...and more!

It's not easy being the CFO of a company with a badly scalded balance sheet these days. And if the balance sheet is only expected to deteriorate further, even the bravest soul will think twice before accepting the coveted post. Unfortunately, the CFO of India Inc or in other words, India's prospective finance minister may not even have a chance to turn down the offer. He will most likely be thrust into the limelight, facing the daunting task of bringing the country's battered finances back on track. At last count, India's fiscal deficit, a measure of how much more it spends than earns, was close to breaching the 6% mark when calculated as a percentage of GDP. Gargantuan spending programs such as farm loan waivers and sixth pay commission were already straining finances and when the government had to resort to fiscal incentives to lessen the impact of economic slump, matters only became worse.

-------------------------- Don't Miss --------------------------
This Secret To Investing Is Already Ringing Cash Registers
But Only An Elite Few Know About It...And An Even Smaller Number Have Benefited From It.
Here's your chance to be one of them...Read On...

Now, if the new government were to oblige to its pre-poll promises, the damage could only be imagined. India's debt, which has already been cut to negative by S&P, may even be downgraded to junk status. And that may not be a pleasing prospect for a country that needs capital by the dollops. One way out of the mess would be selling stake in government owned companies. But given the controversy it can create, especially if the Left parties have a say in government formation, stake sale is not going to be an easy proposition. Sadly, everything else looks long drawn out and difficult. If only we wouldn't have gotten ourselves into this mess.

Given that the last phase of elections got over yesterday, several news channels and papers are carrying results of the exit polls. The results indicate no clear majority for either the UPA or the NDA led coalitions, though the former is seen as having a slight edge over the latter. Now, before the election results are announced this Saturday (May 16th), we will be seeing the political parties draw up permutations and combinations (sophisticated terms for 'horse trading') to up their score in the Lok Sabha (lower house of Parliament).

At the same time, corporate India will be praying for stability. And as per vibes emanating from India Inc., which is already reeling under the global downturn, companies would like to see a stable government led by either the Congress or the BJP. And not without reason. After all, the Indian economy has become a trillion dollar one after good, consistent growth in the past ten years, which has seen both the BJP and Congress-led governments complete their terms.

The promoters of Ranbaxy may have exited the company by pocketing a cool US$ 3.4 bn in cash, but the acquirers of Ranbaxy, the Japanese based Daiichi Sankyo is paying a heavy price. Ranbaxy reported massive losses in CY08 and 1QCY09, which has considerably dampened the profitability of Daiichi as well. Infact, the Japanese company also slipped into the red and posted losses to the tune of 336 m yen (approx Rs 17.2 trillion) for the year ended March 2009. Daiichi holds 64% stake in Ranbaxy. As a result, Daiichi has not only cut its dividend for the year but has also chosen not to pay bonuses to executives.

Ranbaxy has seen its fortunes turn for the worse ever since its troubles with the US FDA began. Not only did the latter raise an import alert for 30 drugs from the manufacturing plants at Poanta Sahib and Dewas, it has also invoked an order which has halted the review of applications from the Poanta Sahib facilities. Thus, a rapid resolution of its issues with the US FDA is the only solution that will pull Ranbaxy out from this slump and Daiichi will also have to actively initiate talks with the US FDA to resolve the matter. But Ranbaxy's troubles run deeper and given that it is mired in forex losses, the possibility of raising debt to compensate for cash outflows cannot be entirely ruled out.

In an effort to gauge the condition of the US economy, investors pay attention to a variety of data points such as unemployment figures, home sales etc. Of late, these numbers seemed to indicate that the worst was over, even if the economy was not yet out of the woods. But the latest data point - retail sales - has played spoilsport. As per the New York Times, consumer spending on gasoline, appliances and groceries has declined. Given that consumer spending accounts for 70% of the US economy, this is bad news. Some economists feel that the shock of the 18 month recession will change the spending habits of Americans forever. We have our doubts. After all, despite the oil shock of the 1970s, gas guzzlers did become a rage once again in the US. It's amazing how much we can forget, given the passage of sufficient time.

Some may feel that an election and the subsequent change of government at a crucial time like this could be a disadvantage to the country. But with the Indian government's finances stretched (thus crippling its ability to give out additional stimulus packages) the ongoing general elections might just turn out to be an inadvertent but effective substitute for the same. A Wall Street Journal report estimates that the spending by political parties and the electoral authorities for things such as transportation, materials and services such as banners, flags and advertising etc will give a boost of about Rs 142 to Rs 364 bn to our sputtering economy. Further, the fact that these funds would have been employed in a concentrated time frame and that it would reach till the grassroots level all over the country will ensure that it gives a much needed push to the economy.

It was always well known that the key to India's scorching growth in the future will be ramping up of infrastructure, but sadly the same has been pushed to the back of the minds of policy makers. But when the former governor of RBI YV Reddy stresses that India cannot sustain a high growth rate of 9-10% unless it develops adequate infrastructure in sectors like power, ports and roads, it is certainly time to sit up and take notice. As reported in the Economic Times, this is what Mr. Reddy had to say, "You should run at a speed that would strengthen your muscles and if you run too fast it will affect your health." Reddy is also optimistic that India can grow at 8% plus from 2011. We certainly hope so, Mr. Reddy!

FIIs may have pulled money out of India in droves between October 2008 and March 2009, as the global financial crisis unfolded. But the silver lining in the cloud is that FDI worth US$ 11 bn poured into the country during the same period. This is certainly important given that FDI is long-term and, therefore, more stable in nature compared to FII inflows, which tend to be more speculative and volatile. Infact, between October 2008 and March 2009, FIIs withdrew US$ 8.3 bn from Indian equities, while the figure stood at US$ 13.8 bn for the full year. Of course, for the full year, FDI was almost flat at US$ 33.6 bn, but it is heartening to know that long term investments are making their way into the country especially since there is optimism that the long-term India story still holds. And what's more, this is the first time since FY99 that FDI inflows have outflanked FII inflows by such a wide margin.

Troubles do not seem to end for the Indian airline industry. As reported in a leading business daily, India's airline firms have reported a drop of around 15% in passenger traffic in April from the year ago. This means that the contraction in air travel that began towards the end of 2007 with the unraveling of the global financial crisis is far from over. This is despite the fact that the traditional busy summer season has started. To put it into numbers, airlines carried 3.3 m passengers in April, compared with 3.9 m a year ago. And the airline to see its market share fall considerably is Jet Airways, whose share during April 2009 stood at 24.1% as against 29.6% in April 2008. Thus, things are expected to look bleak in the medium term unless sustained signs of recovery are witnessed going forward.

With the prospect of bankruptcy looking ominous, the stock price of the once mighty automaker General Motors was pummeled to US$ 1 a share, the lowest since the Great Depression. The company is surviving on federal loans and has until June 1 to restructure its debt or face bankruptcy reorganization.

The Indian markets closed lower by 1% today led by losses in the BSE Capital Goods and BSE Oil & Gas (down 1% each) indices. On the global front, while the Asian indices closed in the red, the European indices are trading mixed currently. As reported on Bloomberg, crude oil prices fell by 2.5% to US$ 56.6 a barrel after the International Energy Agency cut its 2009 forecast for world oil demand, projecting consumption will drop the most since 1981.

 Today's investing mantra
"The investor of today does not profit from yesterday's growth" - Warren Buffett

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Government's promises will fuel damages". Click here!