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An unflattering inheritance - Views on News from Equitymaster
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  • Feb 17, 2009

    An unflattering inheritance

    Double whammy for the new government
    Just as Barack Obama became President of the United States of America at a time when the US was in the midst of its worst crisis ever, so will the new Indian government inherit finances which are in an absolutely sorry state. As reported by the acting Finance Minister Pranab Mukherjee in his interim budget speech yesterday, India's fiscal deficit will stand at an appalling 6% of GDP in FY09. That he expects the same to reduce to 5.5% of GDP in FY10 is hardly a matter of comfort. Certainly, the new government will have a tough task on its hands getting this percentage down especially in a scenario when the global financial crisis has not abated.

    The fiscal deficit can be curbed either by raising tax revenues or curbing expenditures. The problem for the government is that it has its hands more or less tied on both fronts. Not surprisingly, as a fallout of the slowdown, tax receipts have been waning. At the same time, if the economy has to revive, the government will have to spend to boost demand. Subsidies continue to be a major spoke in the wheel and the government did nothing really to address the issue when the Indian economy was growing at a scorching pace.

    These subsidies on food, fertilizers and petroleum among others make up the third largest component of the government's non-plan expenditure after interest costs and defence spending. In fact, efforts to curb spending were done by compromising on capital expenditure which does not bode well given the poor state of India's infrastructure. Indeed, the new government will seriously need to get its act together to address the issue of the soaring fiscal deficit, which if uncontrolled could harm India's economic health.

    Glaxo's largesse to poorest countries
    As seeking a larger share of the pie and improving profitability gets increasingly difficult in developed nations, some of the largest pharma companies are willing to compromise margins to get an entry into unchartered territories. As per Wall Street Journal, GlaxoSmithKline (GSK) Plc, the second-largest pharmaceutical company in the world has signaled a groundbreaking change by promising to cap the prices of the patented medicines that it sells in the poorest countries.

    In fact, the company's management has indicated that it would not even hesitate from sharing critical knowledge about potential generic drugs that are currently protected by patents. GSK Plc has decided to significantly reduce the price of the drugs that it sells in 50 sub-Saharan African countries. It plans to charge not more than 25% of the average price that it charges for the same drugs in the developed world, as long as it can cover costs. GSK currently garners revenues of about 30 m annually from selling drugs to the 50 countries and has operations in 14 of them.

    The quandary of ethanol producers
    The ethanol industry which was in limelight last year on account of higher crude prices is now in a serious jeopardy. With the US economy slowing down and demand for cars falling, the ethanol industry is burdened with excess capacity. To add fuel to the fire, while oil prices have plunged, the prices of corn from which nearly all commercial ethanol in the US is made has continued to remain high. No wonder then that excess capacity is posing a problem. As per Renewable Fuels Association, out of 180 plants in the US, nearly 25 plants have been closed over the last three months. Recently, in order to reduce dependence on foreign oil, US had mandated doubling of corn ethanol use. However, with the deepening recession, meeting the target would most likely be difficult.

    In India, while the government is taking steps to encourage the ethanol sector, the scenario here is not bright either. There is a shortage of sugarcane of up to 30%, due to which the availability of molasses will be on lower side. This in turn will translate into higher raw material costs. Also, with the auto industry in doldrums, lower demand for cars would only mean lower offtake.



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