This Could Derail India's Push for Growth...
(Sep 9, 2015)
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In this issue:
» Are good times back for the FMCG sector?
» Public sector banks need to get their act together
» ...and more!
Let us step back and look at some facts about the Indian economy as they stand today...
Economic growth has slowed considerably in the last couple of years. Whatever recovery we have seen has been anemic at best.
The last couple of results seasons haven't been great for India Inc, as earnings growth has been tepid. Most companies have stated that the investment cycle has yet to pick up.
There are some positives: Commodity prices have fallen, which helps companies control raw material costs and should ease pressure on the finances of the government. And inflation has been falling, which puts pressure on the RBI to announce a rate cut.
The key here is to kick start the investment cycle and bolster infrastructure. But how easy is it for the government to do this?
The importance of ramping up infrastructure to take India's growth to the next level can't be emphasized enough. And although the Modi government has the potential to deliver on this front, the overall scenario does look a bit challenging.
The government is under tremendous pressure to get its finances in order. For that, it has laid a roadmap for reducing the fiscal deficit. Targets have been set for every year.
Now, deficits typically occur when government expenditure exceeds government revenues. To bolster revenues, the government is relying heavily on tax collections and proceeds from disinvestment.
The crucial part is the expenditure. It's obvious the government will have to spend aggressively on capex if the investment cycle, and consequently growth, is to pick up.
But does it have the leeway to do so? If the government is serious about sticking to its fiscal deficit targets, there are a lot of non-capex-related expenses coming up that could derail the push for economic growth.
One is the possibility of a sharp increase in defence pensions. As reported in the Mint, the One Rank One Pension (OROP) scheme is estimated to cost the government around Rs 180-220 bn including arrears. Then there is the recurring annual cost, which has been pegged at Rs 80-100 bn. This could go up as pensioners retire early and live longer. Then there is the seventh pay commission hike that the government needs to deal with. Pay and allowances could rise 16%, and pension payments could jump by 30%.
Lower oil prices have eased the pressure on the deficit, but they are beyond government control. Within its control, though, is increasing tax collections and selling stakes in public sector units. The latter, however, so far has not contributed as successfully as originally envisaged.
All of this means that there is an increasing possibility that planned expenditure, i.e. capital expenditure, which is critical for growth, could take a hit. It's not that the government won't spend. It's that the scale of the spending could be compromised.
If so, it will be at the expense of India Inc, and the revival of earnings growth could take a bit longer.
The government is walking a tightrope. How it will all play out eventually is anybody's guess.
Do you think that there will be a delay in India's investment cycle picking up? Let us know your comments or share your views in the Equitymaster Club.
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The fast moving consumer goods (FMCG) industry has been battling slowdown. With the exception of a few companies such as Dabur, Godrej Consumer Products, most of the FMCG companies have been reeling under low single-digit sales growth for more than a year now. However, companies have been able to sustain margins thanks to a commodity meltdown and this has eased input cost pressures. Some of the FMCG companies have even passed on price cuts for select products. But most of them have utilized cost savings to invest behind their brands.
According to a survey, demand for FMCG goods in urban India remains sluggish even as rural areas have outperformed albeit on a low base. Even deflation in product prices has helped in pushing up rural consumption. But going ahead, the below average monsoons can act as spoilsport. As per Nielsen, the momentum in FMCG sales is not expected to bounce back to high growth rates witnessed in 2009 very soon. Therefore it could take some time before the consumer goods industry is back on the fast track.
Are good times back for consumer goods?
From slow demand, we now move on to a more serious problem of piling bad loans that can play havoc with the survival of public sector banks (PSBs) in the country. As per RBI's Financial Stability Report, the stressed advances consisting of both non-performing and restructured shot up to 13.5% of total advances as of March 2015. The private banks were relatively better placed as the proportion of their stressed advances stood at 4.6% of the total advances.
What is worrisome is that as per a survey conducted by consulting firm Ernst & Young, the non-performing assets (NPA) crisis in the banking system can deteriorate going ahead. E&Y has stated in its report that a huge 72% of the respondents mainly consisting of bankers feel that RBI's debt restructuring norms under the 5/25 scheme is being misused by borrowers. As per the 5/25 scheme, banks have the option of refinancing loans extended to long term infra projects every five years. As per the report, banks were deliberately restructuring accounts to escape the tag of NPA on their books. The report points out that 40% of the loan accounts restructured between 2011 and 2014 had turned bad.
Therefore unless PSBs get their act together and clean up the mess in their balance sheets, the nightmare of bad loans will continue to haunt them in future.
Indian stock markets traded firm in today's trading session backed by sustained buying activity across index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 450 points. Gains were largely seen in metal and auto stocks.
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