Will the government cook up fiscal deficit figures? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will the government cook up fiscal deficit figures? 

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In this issue:
» Why 2013 rally is not like 2008?
» Bill Gross thinks every asset class is inflated
» India almost scores a century in one Forbes survey
» The top defaulters of PSU banks
» ...and more!

In FY13, India's fiscal deficit was at 4.8% of GDP. And the finance minister has given assurance that in FY14, the government will be able to rein in the deficit through various austerity measures. However, considering the huge subsidy bill and falling tax receipts reining in the deficit appears difficult. Yet the government is confident of doing it without even raising its borrowing programme.

Now, the primary reason for cause of increasing fiscal deficit is subsidy burden. And fuel subsidy is one of them. So, the obvious way to conceal the actual deficit number is to manage fuel subsidies. In the past, the government resorted to rampant issuing of special securities called oil bonds to oil marketing companies (OMCs). This was to ensure that the burden does not reflect on its own balance sheet. Although the practice has been discontinued and the PSU oil companies are now paid in cash, the oil bonds still appear in the balance sheets of OMCs suggesting that Government still has a huge liability to take care of.

Further, seems like the practice of camouflaging subsidies is here to stay. It is not just oil bonds but several other 'special securities' that have helped the government book up the fiscal deficit number until recently. As per an article on Firstpost, currently special securities worth Rs 2 trillion are outstanding!

Rest assured that oil bonds are not the only culprits. Let us now look at how fertilizer subsidy is being managed through special arrangements. In order to fund fertilizer subsidies, the government makes an arrangement with PSU banks. These banks make payment to fertilizer companies for subsidies that are due. On a later date, government makes the payment to PSU banks. This effectively means that PSU banks are financing the fertilizer subsidy! Yet another example relating to off balance sheet funding.

We wonder what kind of arrangement government is likely to make in order to finance huge food subsidy burden post the enactment of the Food Security Bill.

It is therefore evident that the special securities have allowed the government to rein the deficit within its targeted number. Actual deficit though is much higher. Such arrangements may keep India's economic data temporarily healthy. But it is only a matter of time before our vulnerability becomes evident. Investors therefore have every reason to be circumspect of the veracity of economic data, both global and domestic, and keep their portfolio resilient to the worst case scenario.

Do you believe India's fiscal deficit numbers are authentic? Let us know your comments or post them on our Facebook page / Google+ page.

01:50  Chart of the day
The asset quality of public sector banks (PSUs) has been deteriorating assets (NPAs) are steadily increasing. Unscrupulous lending and concentration of loans to big borrowers is the primary reason for increasing slippages. Recently, the All India Bank Employee's Association (AIBEA) released the list of top 50 defaulters who have not repaid their bank loans. Collectively, they owe about Rs 405 bn to the PSU banks (except SBI). Vijay Mallya's Kingfisher Airlines tops the list with a sum of Rs 26.7 bn. It is followed by Winsome Diamond and others as can be seen in today's chart.

The most worrying factor about rising NPAs in PSU banks is that they have increased due to weak credit administration and not due to financial crunch resulting from global crisis. These are ominous signs for PSU banks. It indicates that their lending practices were inadequate and proper credit checks were not conducted before loaning out money. But the steps taken by these banks once slippages have occurred are even more worrying. Most banks are undertaking write offs rather than indulging in loan recovery. This indicates laxity in efforts on their behalf to recover money.

Top loan defaulters of PSU banks
Data Source: *KFA- Kingfisher Airlines

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Something strange is happening in the Indian stock markets these days. The markets are flirting with new highs, close to the levels seen in 2008. Unfortunately, there is nothing more to the nostalgia. In 2008, the gain in the markets was supported by high growth in the Indian economy. At an enviable growth rate of around 9%, the economic growth rate was around all time high. India then had a strong claim to become Asian power house and seemed like a safe bet for an investment. Coming back to the present, disconnect between the Indian economy and Sensex could not be starker. The GDP growth rate is crawling at around 5%. Even as there is hardly any optimism about the future prospects of the economy; the markets are touching new highs. Ironically, the driving force behind the rally is also one of the key concerns in the Indian economy. The weakness in the domestic currency and hence the benefits accruing to Indian exporters is a key factor that has pulled foreign money to the stock markets. This is obvious from the fact that stocks of the companies whose business is linked to Indian economy is languishing in the red while stocks in the sectors such as IT and pharma are finding huge favour.

However, the rally that is unlikely to last long. The first factor that will have an immediate impact will be Fed tapering. Indian economy is already out of favour as far as macroeconomic environment is concerned. There is hardly any internal catalyst with regards to reforms. Hence, it is just a matter of time when Sensex will start reflecting the ground realities. As such, the investors should not get carried away by the current trends and invest only in the stocks with robust fundamentals and attractive valuations.

After 12 years of negotiation, the World Trade Organisation (WTO) might reach a historic deal in Bali. Hopes of a deal in Bali were first raised when India, after a lengthy period of objection, indicated it was prepared to support the deal. India's desire to safeguard and stockpile low-price grain for its poor had met resistance from other countries. They were concerned that some of the food might find its way onto global markets and affect prices. The deal could boost global trade by US $1 trillion over time. The deal would lower some trade barriers and reduce the time goods take to clear customs. But it falls far short of the more ambitious global free-trade deal championed by the WTO ever since the 2001 Doha round of talks. However, Cuba and three other Latin American companies have raised objections. Failure to reach an agreement would devastate the body's credibility as developed nations turn towards regional and bilateral trade talks.

So it seems that all the negative news coming out of India over the past few years has impacted its ranking in best global countries for doing business. As per Forbes, India ranks at a very low 98th position in the list. Key reasons for the same include poverty, corruption, discrimination against females along with other challenges such as violence, ineffective enforcement of IP rights. Infrastructural issues - such as inefficient power generation and distribution system and inadequate transport and agricultural infrastructure - have also been cited as reasons for the low ranking. India, in fact fared poorly when compared to its BRIC counterparts as well. While Brazil was ranked at the eightieth position, the other two nations ranked in the mid nineties. Ireland topped the list followed by New Zealand and Hong Kong.

India has ranked poorly in many such global lists in the past. And with the way the negative developments have been emerging in the country over the past few years, the country's position has only slipped lower overtime. Barring certain parameters such as innovation and investor protection in which India ranks at respectable positions, it has fared poorly on all of the other aspects. Red tape and tax burden are areas the country needs to improve upon the most.

There are enough fingers pointing at them. But all this while Ben Bernanke and his colleagues at the US Fed chose to shut out all the noise. His successor Janet Yellen too continues to live with the belief that cheap money can solve the US' economic problems. And the originator of cheap money policies of US Fed, Alan Greenspan believes that the cheap money will continue to push US stock prices higher. This is even as he acknowledges the possibility of US' GDP growth tapering. Amidst such cacophony, at least there are few voices that show some semblance of a rational mind. One of them is that of world's largest bond fund manager, Bill Gross. Gross, who runs the world's biggest bond fund at Pacific Investment Management Co (PIMCO), quite disagrees with Greenspan and his successors at the US Fed. As per Moneynews, Gross believes that not just US stocks and bonds, but every other asset class have gone to levels that exceed measures of true value. And investors who buy into such frothy valuations could be skirting huge risks. We cannot agree more with Gross' view as we believe that it is only a matter of time before global markets feel the pinch of inflated asset prices.

Meanwhile, major global indices remained subdued after the worries over Fed tapering grew. That said, the strong US job data released during the week is expected to send positive signals across global markets in upcoming days. Moreover, the global economic growth is expected to pick up for the current fiscal; albeit the risks remain. These positive developments coupled with a decisive win in exit polls have led to a turnaround in the sentiments of the domestic investors of Indian markets. Majority of the Asian stock markets reported strong gains with the Indian and Chinese indices clocking gains of 1.0% and 0.7%, respectively.

The fears of strong US job data that might prompt Fed to lower the tapering program impacted the European Indices during the week. Moreover, the worries on the ECB front exacerbated. The talks over the fiscal cliff have stalled which sent negative sentiments across European Indices. Stock indices in Germany and France posted losses of 2.5% and 3.9%, respectively for the week. Even the US markets were marginally down by 0.4% on weak sentiments during the week gone by.

Performance during the week ended 06 Dec 2013
Data Source: Yahoo Finance

04:50  Weekend investing mantra
"A public-opinion poll is no substitute for thought." - Warren Buffett
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4 Responses to "Will the government cook up fiscal deficit figures?"

krishna Murthy

Dec 8, 2013

I do not have an iota of doubt that the govt is cooking the facts. So to say that file is missing, no wrong done, it is not my duty to maintain coal files, judiciery is over stepping, not taking action itself an action. This show that highest level of irresponsibility of Govt, in Particular PM.

Like (1)

Ganesh Sastri

Dec 8, 2013

Holding companies and subsidiaries could hide a lot of stuff when they were not required to consolidate their accounts. Likewise GOI is able to fudge a lot of stuff. First instead of following their funny finicky flawed accounting based on receipts and payments, which can be advanced and postponed at will by govt, it should follow ACCRUAL METHOD and CONSOLIDATE its accounts with state govts, PSUs, SEBs, etc. Only then the TRUE DEFICIT will come to light. Second, market should avoid ABSURD FRACTIONS. Deficit to GDP is one such absurd ratio. You cannot repay or reduce deficit with GDP. You need to measure the ratio of DEFICIT to FUTURE SURPLUS(of which there is none in sight). Measured as a percentage of NON REFUNDABLE RECURRING REVENUES, GOI's deficit is THREE times its revenue. For every one rupee GOI earns, it spends THREE times. This is unsustainable and has resulted in a MASSIVE INFLATION during the last five years when it started spending beyond means. Equity Master should fight for a BALANCED BUDGET.

Like (1)


Dec 7, 2013

The subsidy figures are far from real.They are cooked up in a variety of ways like one time income by sale of PSUs/ other assets, Deferring liabilities by issuing bonds / special securities, the latest likely fad of a special one time hefty dividend from cash rich PSUs.

There is no discipline to cut down on expenditure or curtail / withdraw MPLAD scheme like blatant looting of funds, reduction of staff due to automation, rationalising the ministries etc

Like (1)


Dec 7, 2013

Though we do not the nitty gritties of how the subsidy burdens are camouflaged, we are well aware that the government / finance ministry releases fudged figures to paint a rosy picture. A large part of the Indian population who are educated enough to understand how the fiscal economics of the nation works are aware of this. However, a large part of the national population being illiterate, they fail to understand the tricks of the government. There only alternative for the government is the hardest way of implementing cutting subsidies. The affluent population also should sacrifice their luxurious standards and share the pains of the lesser affluent classes to even the equality in growth.

Like (2)
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