Cash rich PSUs at the receiving end once again? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Cash rich PSUs at the receiving end once again? 

A  A  A
In this issue:
» No change in key benchmark rates
» Are BRICs attractive any longer?
» Will India resort to a loan from the IMF?
» China may be going the Japan way?
» ...and more!

Never before has the spotlight been as focused on the sorry state of the government's finances as is the case now. The rising fiscal deficit has been cited as one of the primary reasons for the steep fall of the rupee against the dollar. Leading rating agencies have threatened to downgrade India's sovereign rating if the situation does not improve. Certain reforms have been introduced for cutting subsidies down. But so far, these have not been effectively implemented and many grey areas remain. Meanwhile, there is not much room for the government to concentrate on areas such as infrastructure, education and healthcare where spending is necessary.

The government appears to be at its wits end to figure out how to bring the deficit down. But one idea seems to be consistently on the back of its mind. And that seems to be punishing the PSUs for the excess cash that they have on their books. Indeed, the government's Rs 400 bn disinvestment target has hit a wall with the markets being so volatile. So the latest is that public sector companies that are sitting on hoards of cash could be asked to buy back shares from the market to help government to meet its target. As reported in the Economic Times, three companies have been shortlisted for the same. These are Coal India, National Hydroelectric Power Corporation (NHPC) and National Mineral Development Corporation (NMDC).

Most of the PSUs were asked to list their capex and investment plans. Those who do not intend to make heavy investments could probably be compelled to buy back their shares. Readers would do well to recall that in the past, the government had been contemplating making the PSUs dole out special dividends out of the cash reserves that they own. That idea has not been completely done away with either.

All of this only highlights the fact that the government is looking for a short term solution to fix the problem. And this seems to be especially so since elections are just around the corner. There are bigger issues at hand that need to be tackled with and which require much more meaningful solutions. These are ramping up infrastructure, doing away with red tapism and corruption, spending more on productive sectors and the like. This is what will ensure that India is not faced with the problem of deficits, inflation etc. on a regular basis. But we wonder whether the government is in any mood to listen.

Do you think asking cash rich PSUs to buy back their shares will once and for all solve the government's rising deficit problem? Please share your comments or post them on our Facebook page / Google+ page

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01:26  Chart of the day
One of the primary reasons for India's slowdown in GDP has been attributed to poor growth in industrial and manufacturing activity. And there seems to be no respite on this front. Industrial activity in India declined for the month of May 2013 as displayed in today's chart. It has been hoped time and again that a cut in interest rates would go a long way in bolstering the sector. But the RBI is in no mood to relent as inflationary pressures remain high. Exports have also continued to face heavy weather as the global macro environment has remained weak. In comparison, China's industrial production has grown at a healthy pace. However, growth in China has also been slowing down and whether this can be sustained in the coming quarters remains to be seen.

*Data for US, China is for June 2013. For the rest it is May 2013
Data Source: The Economist

While the rain Gods have blessed us more than adequately, the risks to growth continue to increase. On one hand there are issues for growth. On the other hand, there is the Indian Rupee which has been steadily falling. As a result, the job of the Reserve Bank of India (RBI) has become even tougher. With external stability taking precedence, the RBI decided to leave the key benchmark rates unchanged in its monetary policy review today. As such the repo rate and cash reserve ratio (CRR) currently stand at 7.25% and 4% respectively.

The point of concern however was that RBI continued to raise concerns over growth. In this regard, it has revised its FY14 GDP projection downwards to 5.5% from the earlier 5.7%. In its opinion the onus for reversing the slowdown lies on the government. The RBI has urged the government to take the necessary steps for reigning in the current account deficit. That and stabilization of the Rupee are the two most important things to consider. These are structural issues that need to be fixed up if RBI is expected to reverse its hawkish stance.

The 4 nation group of emerging markets, fondly referred to as BRICs was the apple of investors' eyes. And it made sense. They were providing attractive investment options. And all this time their economies were delivering high growth year on year. As compared to the struggling developed countries, these countries came off as a breath of fresh air. But a lot of that has changed. The BRICs (Brazil, Russia, India and China) have seen their economies slowing down in recent times. And to add to this some are seeing massive currency devaluation as well. This makes one wonder if the investment attractiveness of the BRICs is still intact or not.

As per Ruchir Sharma, head of emerging markets at Morgan Stanley, BRICs are no longer attractive. He has gone on to say that only China can be expected to do well over time and that too with caveats. The reason - BRIC economies are stuck in the middle income trap. This means that they have done all that they can to reach a certain income (per capita) level. Now to move to the next level they need to change/reform their processes. Other than China, Mr Sharma does not see this happening in any of the BRIC nations. We could not agree more with him on the reform front. That is something we have been writing about for quite some time now. If India wants to move to the next level of growth it has to and we reiterate HAS TO proactively pass and enact reforms. Otherwise we can simply kiss the days of high GDP growth good bye.

Widening current account deficit (CAD) and drying capital flows has worsened the balance of payment (BoP) situation for India. There have been worries on how to finance this short term imbalance. With CAD and capital flows seeing no signs of revival resorting to a loan from International Monetary Fund (IMF) is under contention as well. But should India really opt for it?

At the outset it may be noted that IMF loan comes with stringent constraints. And with elections due soon going for a loan now may well turn out to be risky. Currently India's forex reserves stand at about Rs 279 bn. Thus, India has sufficient forex cover. Generally IMF loans are resorted to when a country's forex cover is not sufficient enough to pay for the imports. While India's reserves kitty is declining the situation is not that precarious. Hence, taking an IMF loan should be the last option in the mind of government. In fact, India has taken a loan from IMF only thrice till date. Resorting to a loan now can mean that efforts to resurrect CAD will take a back seat as the government will get a temporary relief. Instead of taking a loan, government should take further steps to arrest increasing CAD. Restriction on gold imports was a step in the right direction. We believe manufacturing also needs to be given a push so that exports flourish. This can help resolve the BoP issues without borrowing money from any external agency.

China. Where is the dragon economy headed? Will China go the Japan way? This is a very big worry these days. Especially because China has largely emulated the economic model that Japan did during it heydays. The economic model that is heavily focused on exports and credit-fuelled investments. Given the changed global dynamics, China can no more rely on the same economic model to sustain future growth. And this shift is going to be anything but smooth. It has invested way too much in property and new capacities. And it is fast losing the cost advantages it enjoyed so far. Wages are rising rapidly. The returns on investments are on the decline. China's demographic trends are also a matter of worry. There is a rapid rise in the ageing population. All in all, China s likely to witness troubled times ahead.

In the meanwhile, persistent selling activity led the Indian stock markets to fall deeper into the red during the post noon trading session. At the time of writing, the BSE-Sensex was trading down by about 140 points or 0.7%. Barring stocks from the information technology space, selling activity was witnessed across the board. Midcaps and smallcaps were trading weak as well with the BSE Mid Cap and BSE Small Cap indices down by about 1.5% each. Stock markets in other parts of Asia were trading firm with Japan, China and Hong Kong up by 1.5%, 0.7% and 0.5% respectively.

04:56  Today's investing mantra
"The extraordinary thing about the securities market, if you judge it over a long period of years, is the fact that it does not go off on tangents permanently, but it remains in continuous orbit."- Benjamin Graham
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12 Responses to "Cash rich PSUs at the receiving end once again?"

Ashok Kumar gupta

Aug 11, 2013

Liquidity is a problem, but for whom, it is the main question, the liquidity is the problem to the upper rich class, they insist to the government with their lobbies that interest rate is to be reduced on loans taken by these industriliast, there was a news that top 30 customers of the banks almost used the entire loan portfoilio of the bank (including PSU & PRIVATE),
We people are talking of GDP ,

I WOULD LIKE TO KNOW WHAT GOVERMENT HAS DO ANY THING FOR SOFTWARE INDUSTRY this industry grows of its own in my opinion by DEFAULT as the growth in world economy was there and we have the maximum youth graduate who can speak and understand english.

I would request the policy makers of this country to see at all levels

Like (1)


Aug 7, 2013

Neither buy back nor special dividend is the solution.It is the time for government to introduce good governance in running its administration so that benefit goes to the common people.This would ultimately arrest liquidity problem of Government.

Like (1)


Aug 5, 2013

Liquidity is a problem but black money is not shy in the economy they are playing a great role in the economy but that is not reflected in GDP.
To strengthen the liquidity the idea is good to buy back shares of those PSUs who don't intend to make heavy investment and have no capex plan right now.
This will boost the mood of the smaller investors and would meet the liquidity problem to a some extent .
Further more to enhance return on investment of fund managers of New pension system which become effective from 1st January ,2004 in respect of central govt employees and others those introduced NPS for their employees ,The Capital market should give good return because Employees pension money is now in Stock market.

Like (1)

Raju Gianani

Aug 3, 2013

First, to control Oil Imports Bill which can be done by development of public transport system on mass scale and should be immediately implemented where new cities and towns are coming up and at such places infrastructure with respect to Transportation and wide roads can be planned in advance.Increase in oil imports bill leads to inflation and also adds to the weakening of rupee. The government should have a study and review on the public and private transportation system and policies which are practiced in singapore.

Autorickshaws and Taxis should be given an option for passengers sharing subject to the passengers approval I.e both the passenger and taxis/autorickshaws have an option.

Promoting solar charged vehicles or renewable energy systems etc with incentives to the respective industry in the form of taxations etc.

Dependence on oil imports have to be controlled on warfooting but practically it is increasing day by day with the increase in traffic etc

Like (1)


Aug 2, 2013

Politician's black money should be traced and their assets attached for recovering Govt.dues from them.Corrupt politicians needed to be weeded out. MMS should be given free hand to deal with deficiat. Don't kill cash rich PSUs.
Make use of our natural resources.Bring Janlokpal. Punish corrupt.

Like (1)


Aug 1, 2013

Your articles are highly biased and hence one sided. Every paragraph would have negative word against government.

Like (1)


Aug 1, 2013

The Govt. should not and ,must not ask the cash-rich PSUs to buy back shares as this move can weaken the PSUs. Why the PSUs should take the burden of the govt. as the mess is the creation of the govt.In fact these PSUs should pass on the excess money by way of dividend to the common share holders.

Like (1)

Himanshu Rajan

Jul 31, 2013

The forex reserv figure of Rs 279 bn is actually $ 279 Bn.

Like (1)

R N Gandhi

Jul 31, 2013

Declaring Amnesty scheme even for those corrupt politicians and business houses to bring back Dollars stored in Swiss banks and other foreign banks is the only remedy for the present day soaring prices of Dollar ie exchange crunch and the funds required for development of Economy. We have to restrict exports of essential commodities and import of luxury items to control the prices.

Like (1)


Jul 30, 2013


Like (1)
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