This will severely inflate CAD

In this issue:
» Infrastructure, banking need Rs.10.4 trillion bond funding
» Government to further milk profit making PSUs
» India gets tough on loan defaulters
» Asset managers need to be more transparent
» ...and more!

00:00

The Finance Minister has repeatedly asserted that India's current account deficit (CAD) and fiscal deficit will be limited to US $70 bn and 4.8% of the GDP, respectively, during the current fiscal. While achieving the CAD target might be possible due to reduction in imports (especially gold) and slight pickup in exports, achieving the fiscal deficit target seems a bit far-fetched.

Currently oil contributes highest to the import bill. But apart from this, there could be a bigger time bomb waiting to explode. The period between 2005 and 2008 witnessed a series of steel capacity addition announcements, over 50 million tonnes (MT). However, several large Greenfield projects have not taken off and several others have been severely delayed. Most are left to hunt around for adequate raw material supplies. Others face delays in their expansion plans, troubles with land acquisition, lack of adequate infrastructure and bureaucratic delays continue to obstruct new projects.

India's current steel capacity stands at 96 MT. The country would have to triple its capacity by the middle of the next decade to meet the expected demand. It takes around 8-10 years to fully commission a steel plant. If the current challenges persist, India is likely to fall 60-70 MTPA short of the capacity required to meet its domestic demand. Thus we would have no option but to import steel. This could inflate our import bill by nearly US $20 bn. It would make steel the second highest imported item after oil. India has already become a net importer of steel from May this year.

So what can the government do to avoid this situation? For starters - The raw material situation needs to be sorted out. The government needs to increase iron ore supply for domestic steel industry, which is currently running at very low capacity due to the mining ban. Such a move would bring down steel imports worth a whopping US $6 bn. It would also promote steel exports and curb the current account deficit. Iron ore exports of 100 MT would earn India US $10 bn, while the country would earn $8-9 bn through exports of just 10 MT steel.

Far more than the impact captured through twin (fiscal and current) deficit numbers, it is the impact on the business confidence that further affects investments. Therefore, bringing down the twin deficits should be the top priority of the government. In view of the massive steel requirement for infrastructure development, there is a need to significantly increase steel production capacity in India. Without this India's CAD situation could get a lot worse compared to what it is currently.

Will steel become the second highest import item after oil? Let us know your comments or post them on our Facebook page / Google+ page

01:12		Chart of the day

Long-hailed as the next big economy, India has staged a remarkable fall from economic grace during the past year. Growth in 2013 was just 5%, compared with the 9% average annual growth rate in the prior 10 years. Growth engines have slowed down. The warning signs of stagflation - slowing growth, rising inflation and high unemployment are all around. But when compared with other emerging economies, India is worse as far as inflation parameter is concerned. Since the global financial crisis started in 2008, economic growth rates have slipped while inflation has accelerated or remained at elevated levels in many large emerging economies. That's because, while local demand and supply scenarios are responsible to a large extent for domestic inflation, global liquidity and the depreciation of the local currency have also played a major part.

India not alone in stagflation problem

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02:00

The hopes of public private partnerships funding India's infrastructure spend have disappeared. Despite the elaborate planning in consecutive 5 year plans very little private sector equity has flown into infra projects. Whatever little did come is stuck up without generating enough returns for the investors. Public sector companies have not been better off either. And with most infrastructure projects stuck due to lack of resources or policy bottle necks, the sector itself has become a no-go area for PSUs and private sector alike. Hence, as per rating agency CRISIL, if debt funding is the way ahead, the bond markets need a new avatar. As published by Mint, CRISIL has estimated that bond markets will have to help Indian banks raise nearly Rs 10.4 trillion over the next five years. Of this, Rs 7 trillion would go towards infra funding and the rest towards meeting the banks' own capital norms. Only then will the banks be able to fund the credit requirements of theinfrastructure projects after meeting the Basel III norms. Without enough depth and regulations for the bond markets we wonder how this will be feasible.

02:40

Regular readers of this space would recall that we had mentioned a few days back the Finance Minister would need innovative ideas if he wants to meet his fiscal deficit target. And that is exactly what he has resorted to. As reported by Business Standard, he plans to ask the cash rich PSUs for a special dividend in January. The proceeds so received would be utilized to meet the fiscal deficit target. Last year the government had budgeted Rs 27,178 crores as dividends from PSUs. As per the revised estimate, this amount went up to Rs 29,996 crores. And this year's target is Rs 73,886 crores. The FM will ask those PSUs for this special dividend who have held back on their target capex this year. In effect the cash rich PSUs would be bailing out the government isn't it? The question is why should they? These are good PSUs doing their business in such a way that they are able to generate cash even in these depressed times. And rather than rewarding them, the FM will be asking them for more money to fund the government's populist policies.

03:20

Rising bad loans is turning out to be a big problem for India's banking sector. What is worrying is that in this, the number of willful defaulters is rising. A defaulter becomes willful when he is able to repay debt but is not doing so. This is because the funds that he has at his disposal are being utilized somewhere else. For banks, recovering such loans has become a challenge for various reasons. One is that the law with respect to defaults is not too strict. There is no stigma associated with defaults, no proper bankruptcy law exists and legal recourse takes a long time because of clogged courts. As reported in Business Standard, bad loans larger than Rs 2.5 m at state banks amounted to Rs 1.2 trillion at the end of June. These were the ones that were classified as willful by the RBI. This was up 18 times from June 2008. The fact that high profile companies such as Kingfisher Airlines have defaulted on loans has all the more impacted banks. There is no doubt that these problems need to be addressed by the RBI and Indian banks on an urgent basis. It does not make sense to use taxpayer's money and restructure loans for companies which are not serious about the successful running of their businesses.

04:00

When there's a whole lot of confusion out there in the middle, what do people responsible for it need to do? Should they continue to ignore the confusion and wait for it to snowball? Or should they address it right away so that the problem is nipped in the bud. It is indeed the second option that is more sensible, isn't it? However, as per an article in Financial Times, it's the other approach that is being taken by the asset management industry in Europe. It should be noted that post the 2008 crisis, finance professionals of all kinds have come under a heavy dose of criticism. But this is unfair points out the article. For buy-side professionals are quite different from smooth talking sell-side guys who were primarily responsible for the crisis. Consequently, both cannot be tarred with the same brush. Therefore the article goes on to conclude that it is time buy-side people like the asset management industry for e.g. come out of the shadows and explain their role clearly to the public. Or else see their reputation getting tarnished every day. Well, the point that bankers were mainly responsible for the crisis is well taken. But to put no blame at the door of the asset management industry is taking it too far we believe. According to us it is the entire system that is to be blamed and unless steps are taken to rectify the same, there would be no long term riddance from the problem.

04:35

Indian markets have opened the day on a firm note and have been trading well above the dotted line. At the time of writing, the BSE-Sensex was up by about 240 points or 1.2%. Stocks across the board were in favour today with those from the banking, realty and metal spaces being the top performers. Mid and small caps were in demand too, with their respective indices up by 0.9% each. Stock markets in other parts of Asia ended the day on a mixed note with Hong Kong and Taiwan ending the day higher by about 0.4% and 0.5% respectively. However, the stock markets in Japan and Singapore faced selling pressure.

04:55

Today's investing mantra

"The person that turns over the most rocks wins the game. And that's always been my philosophy." - Peter Lynch