Another half-hearted stimulus package
(Dec 8, 2008)
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After the RBI's stimulus package announced on Saturday, it was the turn of the government. The central government introduced a 10-point, Rs 320 bn package on Sunday to stimulate the Indian economy. Ironically, this so called 'stimulus' will account for merely 0.6% of the country's GDP! Not surprisingly, the industry's reaction to the package has been lukewarm as it was expecting an even larger package. The funding routed to the infrastructure sector is to the tune of Rs 200 bn. Central valued added tax has been cut by 4% across the board, other than valued added tax. Labour intensive exports such as textiles will also receive sops. Small scale industries will be eligible for funding without collateral to the tune of Rs 10 m per entity.
Although the government has not ruled further steps, it operates under severe fiscal constraints. It may be noted that the Rs 320 bn infusion will nearly double India's fiscal deficit from an earlier projected 2.5% to 5% of GDP by the end of FY09. When viewed in combination with the RBI's actions, we believe the efforts definitely point towards the right direction. However, they may not be sufficient to stimulate the economy.
» India's stimulus package
» Insurance bails out the Taj
» Counting begins in state elections
» Too Big to Follow Rules
» ...and more!
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The recessionary environment is now taking a toll on the sales of luxury goods for the first time in nearly 20 years. It has forced companies that cater to the ultra rich to undertake cost cutting measures, a practice that they are alien to. It's a testament to the fact that the meltdown has affected people across all classes. Top designers like Bulgari, Burberry, Cartier and Montblanc are all facing the heat. In fact, Bulgari's profit in the most recent quarter plunged 44% and its stock finds itself less than half what it was more than a year ago.
Some good news for the Taj Mahal Hotel (IHCL) and Oberoi Hotel (EIH) in Mumbai after the recent terror attacks. Insurers have finally decided to cover all the losses, irrespective of whether they were caused by the attackers or by the security agencies that battled them. Under terrorism insurance rules, insurers do not have to pay for the material damage caused by security forces, but only for that caused by terrorists. However in this case, the insurance companies have decided to pay all the losses because it was not easy to separate damage caused by the terrorists and the security forces. While Tata AIG is the main insurer for Taj, Trident is insured by New India Assurance Company. Cover against terrorism is typically offered as an add-on with property insurance that, along with material loss, also covers loss of business till the property is restored. For terrorism cover, Indian companies pay a premium of 22 paise per annum for every Rs 1,000 insured up to Rs 5 bn, 17 paise for every Rs 1,000 insured up to Rs 2 bn and 13 paise for every Rs 1,000 insured above Rs 2 bn. This insurance cover would aid IHCL and EIH in redeveloping their prime property, without further leveraging their balance sheet.
It may be noted that the Insurance Regulatory Development Authority (IRDA), the industry regulator, has mandated that all general insurance companies collect premiums from terrorism covers in a common pool. Terrorism-related insurance claims are settled using funds from this common pool, created after the World Trade Center attacks in the US in 2001.
It is not just China and India which plan to spend their way out of a slowing economy. The US, where the situation is much graver, has plans of its own. As per a leading business daily, President elect Barack Obama has said that he will make the single largest new investment in roads, bridges and public buildings since the Eisenhower administration's interstate highway program. While doing so, he intends to keep a close eye on results rather than just throwing money at the problem. Those states which do not use the money quickly stand to lose their share.
The thrust of his program will be towards aiding 2.5 m jobs. This is not surprising given that November 2008 witnessed the biggest decline in US jobs in 34 years. While a healthy US economy benefits global commerce including India, the focus on job losses is likely to darken the clouds building up on the poster child of India's growth story - IT.
Recently the government issued a press note pegging the selling price of RIL's KG basin gas to the Dabhol power plant at US$ 4.2 per m British thermal unit. It also said that the price, which was first fixed on September 12, 2007, will be binding on all customers. It may be noted that RIL is fighting two court cases regarding the price, one with NTPC and the other with RNRL. As expected, RNRL has responded with an affidavit refuting the government's latest move.
The KG basin gas is an energy asset of national importance. We find it ironic that basic contractual agreements have been handled so poorly by all parties involved at a time when India needs to show great urgency in ramping up its energy security.
The counting of votes for the assembly elections recently held in Rajasthan, Madhya Pradesh, Delhi, Chhattisgarh and Mizoram have begun and from the looks of it, it is the Congress which has gained the lead so far. The Congress has done well in three of the above mentioned five states namely Rajasthan, Delhi and Mizoram. While Chhattisgarh has emerged as a major battleground with both the BJP and the Congress locked in a close race (BJP has managed to take a slight lead), the solace for BJP is Madhya Pradesh where it is leading the Congress by a wide margin. This could likely set the tone for the general elections which are to be held early next year. While the Congress has come under fire in recent times due to issues such as high inflation, economic slowdown and terrorist attacks, all of which have questioned the ability of this party to hold on to its seat of power, lack of an effective leadership is a major challenge that its closest rival BJP faces.
While the attacks in Mumbai have impacted a few companies directly, a few have benefited indirectly. Bharat Electronics, which is involved in the activity of manufacturing of defense systems and other products, is one such beneficiary. Its stock is up nearly 32% since the 26th of November. Companies like Zicom Electronics and Micro Technologies, which are in the business of providing various security systems and products, have also seen their stocks surge in the past two weeks. Their stocks are up by nearly 40% and 20% respectively.
The ones that are Too Big to Fail seem to also be Too Big to Follow Rules! Going by what Citigroup, one of the largest recipients of single entity bailout package has been doing so far, that certainly seems the case. As per the US SEC's (Securities and Exchange Commission) rules, if a company is envisaging huge provisioning charges or needs to write down impaired assets, that must be disclosed to the SEC within four business days. If the size of the write off cannot be determined, the disclosure is still required stating that the company is unable to make a good-faith estimate of the amount. However, even a fortnight after the US Treasury offered the beleaguered bank a blanket US$ 306 bn guarantee for its impaired assets, the bank seems to find it non-obligatory to file such a disclosure. As per Bloomberg, given the multiplicity of options that Citigroup has for write-downs (including US$ 39.7 bn of so called 'goodwill' which is worth nothing to a company on the verge of collapse), the bank must be finding it difficult to prioritise the same.
While the debate on whether the current downturn in the US is the worst since the Second World War rages on, one issue seems to have been more or less sealed. The total job loss tally. As per a leading US business daily, the world's biggest economy lost half a million jobs in November, taking the total tally for 2009 to 1.9 m. This easily surpasses the losses of the last two recessions, indicating that a lot of the current-generation Americans haven't seen anything of this magnitude before.
What makes matter worse is the equally poor outlook in the near term that seems to be pointing towards more job losses until atleast the second half of 2009. The huge meltdown in almost all the asset classes in the aftermath of the credit crisis has led to a huge cut back in spending by the average US consumer, who was already finding it difficult to make ends meet. This uncertainty in turn is leading US businesses to slash jobs, setting off in the process, a vicious cycle. What is not helping matters either is the reluctance on the part of banks and financial institutions to kickstart lending despite record low interest rate levels. All hopes seemed to be now pinned on President elect Obama, who has vowed to inject US$ 700 bn into the economy by way of fiscal stimulus. Economists feel that even this planwould have to be scaled up significantly if it needs to have the desired impact. Baptism by fire indeed for the new US President.
As per a leading business daily, Reliance Industries (RIL) has reduced the prices of at least 10 key petrochemical products over the past two months, some by at least 60%, on the back of lower petrochemical prices worldwide. It may be noted that RIL is a dominant player in many chemical segments and had to slash prices across a bigger portfolio of products as compared to PSUs such as BPCL, which reduced prices for fewer products. Petrochemical prices, which are cyclical in nature, have slumped due to declining global demand and inventory pile ups. Significant capacity addition is also lined up in the Middle East in the future, making the road ahead difficult for the industry. The development is likely to benefit end users of the petroleum products such as toys, pipes, cell phones and kitchenware manufacturers.
Stocks in India closed strong today as the benchmark BSE-30 Index ended with a gain of almost 200 points despite a sell-off towards the end of the day's trade. Earlier in the day, markets reacted positively to the announcement of the Rs 320 bn stimulus package. Other Asian markets such as Japan (up 5.2%) and China (up 3.6%) ended firm as well. Stocks in Europe are currently trading in the positive. As per Bloomberg, US index futures rallied after US President elect Barack Obama announced the largest infrastructure spending package since the 1950s to boost the economy.
"Help people. When people are desperately trying to sell, help them and buy. When people are enthusiastically trying to buy, help them and sell." - John Templeton.
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