What we feared is coming true! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What we feared is coming true! 

A  A  A
In this issue:
» India's trade deficit narrows.
» SEBI wishes to widen the insider trading ambit.
» Will the Rs 18 bn fine on CIL set a precedent for inefficient PSUs?
» S&P cuts its estimate for the US economy.
» and more....

India has been going through challenging times. Balancing growth with the health of the country's balance sheet has been a difficult task. The pressures for the current government have only increased with the people of the country giving a very strong message through the recently concluded elections. But with about six months to go for the outcome of the general elections, it is expected that the UPA would go all out to woo voters which could possibly lead to it compromising on its fiscal goals for the current year.

It was only yesterday that we highlighted that this setback could potentially raise political pressure on the government's short term fiscal goals. But the FM quickly responded by stating that he continues to stick by his 4.8% fiscal deficit target.

However, it was only soon after that we came across the news of the Parliament passing the government's demand for additional expenditure of almost Rs 186 bn or US$ 3 bn. Of this, about 70% will be borne by the government, with the balance being brought in by savings of ministries/ departments or receipts & recoveries aggregates; is what has been mentioned in the Second Batch of Supplementary Demands for Grants 2013-14. A large portion of this (Rs 104 bn) would be towards petroleum and fuel subsidies and about Rs 20 bn towards fertiliser subsidies.

Rating agencies have had negative outlook on India's sovereign ratings for a while now, with key reasons for the same being policy paralysis and inability of the government to implement the much required reforms. Further, RBI Governor Raghuram Rajan also expressed his views stating that the government should not postpone passing of the required legislations to the post election period, which is still half a year away. He also added that the country would benefit if measures to grow the economy and improve the fiscal health are taken at the earliest. A key step, as per him, would be to eliminate poorly targeted subsidies, with diesel in particular.

Syncing diesel prices with market rates has been a key reform that needs to be passed on an urgent basis. This would reduce the overall expenses of the government substantially. In fact, as much as 27% of the government's budgeted subsidy expenditure is to be spent towards petroleum products in FY14.

However, as we all know this process of deregulation is easier said than done. Indians have been used to subsidised fuel rates for decades. Increasing prices all of a sudden would have its repercussions such as higher inflation and protests. Which is why this is a very sensitive political issue. And given the government's current situation, one can rule out unpopular measures like curbing subsidies. One can only wonder how much more damage will the government cause to the exchequer in its attempts to secure electoral victory.

All of this only makes us wonder whose interests the government is looking to protect first - country's or self's!

Do you think the FM will be able to stick to his 4.8% deficit target in FY14? Let us know your comments or post them on our Facebook page / Google+ page.

01:35  Chart of the day
India's trade deficit and current account deficit figures are closely watched by many. This is because they have the tendency to influence the strength of the Indian Rupee. The fact is that India's trade balance is poor when compared to its peers. But from the looks of it, the situation is slowly improving.

India's trade deficit narrowed to US$ 9.2 bn in the month of November 2013 . This was largely led by a 24% YoY contraction in non-oil imports. Oil imports on the other hand fell by about 1%. Overall imports declined by 16.4% to US$ 33.8 bn, while exports grew by about 5.9% during the month.

Lower Gold Imports to Improve Trade Balance?

A key reason for the decline in non-oil imports were the lower gold and silver imports, which fell by a sharp 81% YoY. The same stood at just over US$ 1 bn. A key reason for this reduction has been the hike in import duties levied on them.

However, we believe this is a temporary phase as we all know the love Indians have for gold. As such the focus should be on either curbing oil imports or increasing exports. Having said that, a growing economy such as India will have to meets its energy requirements, for which it will have to continue importing crude. As such, the focus has to be on propping up exports. The same largely depends on the global economy, which seems shaky at the moment. But for India to be competitive on a global scale, the government has focus on measures to boost exports to have a trade surplus or a minimal deficit.

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Price formation is no doubt one of the most important activities in a market economy. Therefore, it is important that prices are determined in the most transparent manner possible. This becomes especially difficult in asset classes like stocks. The reason being that prices here are determined by the interaction of thousands of participants. And they change every minute. So, how can a transparent price discovery mechanism evolve in the case of stocks? Well, it has to be enforced we reckon, with heavy punishment in store for anyone who breaches the rules.

Something similar seems to be on SEBI's minds too these days as it proposes to widen insider trading ambit. As per reports, the regulator has proposed to bring even public servants and people holding statutory positions like regulators under the ambit of new set of insider trading norms.

However, this is just one of the many sweeping changes being made. While it is agreed that insider trading is difficult to prove, SEBI has called for a much more stringent punishment once the charge has been proved. We hope the new rules go a long way in deterring people from pursuing insider trading.

The forecast for US GDP growth for 2014 remains tepid. Indeed, as reported in Moneynews, rating agency Standard & Poor's (S&P) has cut its estimate for the US economy to 2.6%. Expected growth was pegged at 3.1% last quarter. S&P's cut in estimates is based on its expectation that there will be additional spending cuts in 2014. This in turn would lead to another round of political stand-off between the Democrats and the Republicans. Fundamentally speaking, economic fundamentals continue to remain weak in the US despite what the so called 'positive' jobs data suggests. It will be interesting to see what the US Fed chooses to do. If the economy stays weak, the Fed will not really go for QE taper. This means that money will continue to be pumped into the financial system. This will find its way into asset classes, which will see prices rise even when the ground reality is quite different.

Good regulation and efficient & transparent allocation of resources can go a long way in ensuring that all players in a sector are on the same footing. However the coal sector and PSU behemoth Coal India (CIL) have had the good fortune of evading such a possibility. As a result of which, both allocation of coal block and mining efficiency have suffered over the years. Over the last two years, the CAG unveiled the coal mining scam and CIL's exploitation of vast resources at its disposal came to light. However, it seems there are far more skeletons yet to come out than one can imagine. State electricity generators like Maharashtra State Power Generation Company and NTPC have been complaining against the poor quality of coal supplied by CIL for long. However they hardly had any recourse. That coal pilferage is rampant in CIL's operations and its hefty profits are the result of its monopoly position is well known. But it was not until the recent imposition of penalty on CIL that hopes of redressal to the aggrieved emerged. The Rs 18 bn penalty imposed on CIL by the Competition Commission (CCI) will create history and will set a precedent for inefficient PSUs. One can only hope that the CCI does not go back on its intent.

Just last month we had shared a shocking insider view of Air India's mismanagement. In his book Descent of Air India, ex-Executive Director Jitender Bhargava has alleged that the airline has been systematically sabotaged to serve the vested interests of politicians and private players. But is this just a one-off case or is that how many public enterprises are run? We're afraid the latter seems to be true. Now it is the government auditor that has aimed its guns at the civil aviation ministry. As per an article in Livemint, Comptroller & Auditor General (CAG) has highlighted "undue benefit" of about Rs 59 bn extended by the ministry to Mumbai International Airport Ltd, a consortium controlled by GVK Power & Infrastructure Ltd. This is yet another embarrassment for the UPA government that has been mired in a slew of corruption scams.

Indian markets continued to trade well below the dotted line throughout the day. At the time of writing, the BSE-Sensex was down by about 157 points (0.7%). Barring stocks from the realty and power space, losses were seen across the board with those from the auto and banking spaces being the top losers. The major Asian stock markets ended the day in the red with stock markets in Taiwan and Japan leading the losses. The major European stock markets were also trading weak.

04:55  Today's investing mantra
"Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least." - Warren Buffett
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4 Responses to "What we feared is coming true!"

Abhay Dixit

Dec 14, 2013

Why only diesel subsidy? Even Kerosene subsidy needs to be reduced by direct transfers. The huge smuggling of Kerosene to Pakistan and Bangladesh can be avoided.

We now have Helicopter Singh, showering money to get votes.



Dec 12, 2013

The Rupee has to be kept strong enough for the under recoveries to be negative.Hiking of or deregulating the prices of petroleum is not the solution.A strong Rupee by reducing under-recoveries will lessen the Fiscal deficit.This will get a better rating.
Less petroleum fuel prices will reduce Inflation,too,which will allow the RBI to reduce the interest rates.
All these will,make the economy boom and lessen the struggle of the common Man to make both ends meet.
The weak rupee seems a con game to hike the prices of petroleum fuels fr the sake of vested interests.


krishna Murthy

Dec 12, 2013

Definitely not the country. As long as self serving at the helm this loot will continue.


sanjeev kumar

Dec 12, 2013

Undue benefit has to be assesed from business pont if view not an accountants view point which is normally a very narrow view point. How can a developer be responsible for delay due to inaction of government to remove a status of Shivaji which was obstructing construction of airport? When Mumbai Airport was handed over to private developers total revenue was around Rs 300 crs and AAI was supposed to meet all expenses out of it. It had more than 2500 employee. Today AAI gets more than Rs 400 crs without the need to pay any expenses i.e pure profit. How can this be explained? Today Airport is far better manager and meeting the world standards on all parameter. Can this be ignored? There are many such pluses and judgement has to be based on overall assessment. It is fashionable to talk anti congress . The analysis of 5 minutes I realise is based on substantiatdd facts and biased

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