Can the government fill this hole?

Jan 6, 2014

In this issue:
» US recovery still remains incomplete
» Ponzi schemes can't be matched on return claims
» Another setback for mining industry
» China's economy to grow at slowest pace since 1999
» ....and more

One of the big challenges that India faces today is huge fiscal deficit. The Finance Minister has time and again asserted that the fiscal deficit target will not be breached. But if we look at the numbers it seems that the FM will not be able to keep his words.

According to the latest data, India's fiscal deficit touched Rs 5095. 5 bn during April-November 2013. This means it has already touched 93.9% of the annual target of Rs 5429.4 bn. This means the government ran an average fiscal deficit of around Rs 636.9 bn per month (Rs 5095.4/8) during that period. Now in order to meet the target, the government can run an average fiscal deficit of around Rs 82.3 bn per month for the next four months. This implies a gap of Rs 554 bn (636.9-82.3) per month or Rs 2218.4 bn over a period of four months has to be raised from somewhere else.

So from where will the government get the money? Considering that the government has already fallen short of its revenue target. Tax collections form nearly four fifths of the government's earnings. And given the slowdown in the economy, it will be highly ambitious of the government to bank on it. Hence, the only way the government can hope to meet its fiscal deficit target is by cutting expenditure. But in an election year, it seems very unlikely.

The government is also banking on windfall gains from the sale of spectrum or disinvestment. But, in our view it doesn't solve the problem. In fact, such one-time bonanzas reduce the incentive of politicians to curb wasteful expenditure and plug revenue leakage. Instead, such one-time gains should be deployed for specific purpose like building infrastructure. The gap in yearly accounts must eventually be solved through everyday effort to shore up tax revenues and running a tight ship.

A deeper government reform is needed to root out corruption and build a modern administration suited for the 21st century. Without this India may see spurts of growth - but not sustained long-term growth. India has run large fiscal deficits in the past, but with a mostly open capital account India cannot afford to do this and have a stable macro-economy.

We would like to remind our readers that we have written on this idea before. But with barely 84 days to go for the fiscal year to end, we thought we would update you on where the government stands on its fiscal targets.

Will the FM manage to keep the fiscal deficit target at 4.8% of GDP? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
It's no news that Public sector banks are in trouble. While rising non-performing assets (NPAs) are a cause of worry for the entire banking sector, it is more so in case of Public sector banks than Private sector banks. Poor credit appraisal, over leveraging and the practice of giving fresh loans to pay off the old ones and leaving the mess for the successor are some of the practices that are prevalent in the Public banking system. Over the last decade, the share of Public sector banks in banking loans has risen only marginally. However, their share in gross NPAs has gone up at an alarming rate. In contrast, the Private sector banks have more than doubled their share in loans while their contribution to gross NPAs has grown at a lesser rate. The actual situation for Public sector banks could be much worse because of the practice of loan write offs.

As per an article in Business Standard, many NPA ratios don't even include heavy debts of some highly indebted corporate groups. In a lot of cases, the tool of restructuring is being misused to manipulate the NPAs. Despite operating in the same economy, the poor performance of public sector banks versus the private sector banks clearly indicates that something is wrong with the former's procedures, policies and the management. No wonder that private sector banks enjoy better valuations over their public peers. It is time that banks and policymakers give a serious thought to bringing some positive changes in the way Public sector banks operate. This is because no economy can be strong unless it enjoys the support of a strong and healthy banking system.

PSU banks with highest NPA's

Just a few days left before he steps down as Fed chief, Ben Bernanke has stated that the US recovery remains incomplete. This is hardly surprising. Ben Bernanke presided over the Fed for the past 8 years. During that time, in 2008, the US witnessed the biggest financial crisis since the Great Depression. But the only option that Bernanke presented was lowering the interest rates to zero. And when that alone did not do the trick, he resorted to large scale bond buying, otherwise called as quantitative easing. Did all of this kick start US' recovery? Not really. Unemployment is still high at around 7%. Because the job prospects are bleak, many Americans have dropped off the work force altogether and have given up looking for work.

Growth in the economy also has not really taken off. All that the Fed has managed to effectively do is increase its debt burden. This QE began to be tapered off recently because Bernanke opined that the job market was beginning to recover. That claim seems quite doubtful. The QE measures by the Fed cannot really be compared to effective long term measures to propel growth. Which means that when most of these measures are withdrawn and the economy takes a hit, we will not be surprised if QE becomes a tool the Fed will once again use.

For once the securities market regulator has nailed it. It is a known fact that it is wrong on the investors' part to have unrealistic return expectations from genuinely good and legitimate investment options. However, greedy and misinformed investors often chase claims that guarantee more than 20-30% returns year-on-year. Result being that they end up investing in shady products. The regulator (SEBI) then has to crackdown on the issuer to save capital losses. This practice has been going on for decades and every few years, unscrupulous companies manage to con investors and swindle millions.

SEBI chief UK Sinha has in an interview to Economic Times cited his intent to make good investment products easily accessible. Mr Sinha reinforced that genuinely good investing products are available. However, investors in semi urban and rural areas have so far not had accessibility to the same. More information and ready accessibility to such products could reduce the instances of mis-selling. We believe that having distribution channels alone will not solve the problem. The regulator needs to also encourage investor education initiatives in rural and semi urban areas for investors to take wise decisions.

Economic growth and development is important, but at what cost? Take mining for instance. Mining is vital for extracting raw materials need by several industries. But mining comes at a huge environmental cost. So it is imperative to strike a balance between pursuing economic growth and conservation of natural resources and eco-systems.

Take the case of mining in Odisha. Heavy and reckless mining in this mineral-rich state has severely impacted its environment, especially around the Baitarni river. As per Economic Times, the Justice M B Shah Commission has now recommended a ban on mining along the Baitarni river. If the recommendations are accepted by the Ministry of Environment and Forests, the operations of top steel and mining companies would be adversely impacted. It is worth noting that about 40 firms and mining lease holders operate 55 mining leases in Odisha that directly impact the Baitarni river. Some big names include Tata Steel, SAIL, Aditya Birla Group's Essel Mining, Jindal Steel and Power Ltd and Sarda Mines.

2013 was a year when a lot of asset classes reversed their long term trends. In fact, even economic growth data were seen deviating from their normal path. It happened with India too what with its GDP growth slumping to a 10-year low. Looks like its northern neighbour China is headed down the same path. As per reports, the growth in the world's second largest economy will hit a multi-year low when the numbers of 2013 will be announced. Indications are that the economy grew by around 7.6% in 2013, the lowest since 1999.

Indeed, with the country's manufacturing and exports driven wheels of growth coming off, the other sectors haven't been resilient enough to pick up the slack. And this is leading to below par growth. Worse still, if the dragon nation fails to handle its debt properly, a system wide financial catastrophe cannot be ruled out. This could easily set its growth back by few years. Thus, the priority for the policymakers should be to try and set the house in order first. If this comes with low economic growth, so be it. But the growth that will accrue once debt problems are taken care of will be more sustainable in the long run. What more, it will also lead to some real wealth creation.

The Indian markets traded below the dotted line throughout the day. At the time of writing, the BSE-Sensex was trading lower by about 75 points or 0.4%. Stocks from the FMCG and pharmaceutical spaces were leading the pack of gainers, while those from the banking and realty spaces were amongst the least preferred. Mid and smallcap stocks were trading positive with their respective indices up by 0.2% and 0.8% respectively. Stock markets in other parts of Asia ended the day on a weak note with China and Japan down by about 1.8% to 2.4% respectively.

 Today's investing mantra
"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." - Peter Lynch

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2 Responses to "Can the government fill this hole?"


Jan 7, 2014

Everyone is talking about corruption at Government. But is it not the private business houses which perpetuates the corruption to cover up their legal and social shortcomings and diversion of funds borrowed for certain purpose for something which is not for the betterment of the economy. Why everyone is silent about the giver and make a hue and cry about the receiver. How will the media highlight this as the media is owned by the perpetrators of the corruption. It is like the story of why rape is not coming down in spite of stringent laws when the media is still commercializing the woman by portraying them as commodities rather than treating them as human-beings exploiting the weakness of a man.
Ultimately whoever be the FM he cannot stop the spending of our politicians and finally the next Government will have to face the music and they also get a chance to give an excuse of the previous Government gave us an empty coffers. Does Aam Adhmi's comments or opinion has any value meaning or relevance?



Jan 6, 2014

Your comments today :Aditya Birla Group's Essel Mining, Jindal Steel and Power Ltd and Sarda Mines.

I believe essel group is different & Sarda Mines belong to Birlas ?
What is correct ?

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