Inclusive growth, auto sales & more...

The mega (Rs 600 bn) farm relief package announced in the Union Budget raised a lot of eyebrows due to the ambiguity regarding the impact of the same on the scheduled commercial banks and the purpose of such a generous dose of welfare package. However, most of the concerns were proven to be baseless as the commercial banks' non-performing assets (NPAs) in the farm sector are estimated to be approximately Rs 110 bn at the end of December, 2007 and Rs 74 bn at the end of March 2007, according to the latest 'Trend and Progress of Banking in India report' of the RBI. The rest of exposure largely belongs to cooperative and regional rural banks (RRBs). In fact, banks that have made a provisioning for the non-performing assets will be able to write the amount back as profit.

Coming to the 'purpose' of the package, the necessity of 'inclusive growth' was elaborately explained by the RBI Deputy Governor Ms. Usha Thorat in a speech delivered recently. First, in most of the emerging economies like India, despite a major chunk of population being based in rural areas, there is significant mismatch in the consumption expenditure. The average monthly per capita consumption expenditure (MPCE) in urban areas in India is almost double that of rural areas. Considerable increase in demand for manufacturing and services sectors has to, therefore, come from the rural population. Second, from supply-side management, growth in agriculture is necessary in order to keep manufacturing prices under check, provide food security and keep inflation under control. Third, the limitations on increasing production and productivity in agriculture are driving migration to urban areas leading to population pressure in urban areas and increase in urban poor. Hence, urban development policies have to focus on inclusive investment to deal with the huge armies of low-income population likely to move into these areas. Thus the farm relief package, if executed diligently, will address several issues.

Sales figures over the last fiscal have been very disappointing for Indian automobile manufacturing companies. The figures for nine month ended December 2007 indicate that domestic sales of automobiles declined by 4.8% YoY. Two wheeler sales registered a decline of 8% YoY and passenger carrier sales fell by 0.8% YoY during the period.

According to the SIAM (Society of Indian Automobile Manufacturers), the reduction in excise duty together with the incentives given to agriculture sector would boost demand. The elimination of excise duties on electric cars would also help promote alternative fuel vehicles. Further, the auto industry is enthused with the proposal to allow 125% weighted deduction for outsourced R&D. This will help the industry to undertake more R&D and access state of the art technologies and capabilities to develop advanced products. More importantly, what are particularly expected to drive the growth of the automobile sector are the enhanced allocation to road infrastructure projects and the availability of trained manpower along with the introduction of a PPP (public private partnership) model.

While the likes of Citigroup are grappling with billions of dollars of write downs, the risk of default of the construction and real estate loans is endangering the very existence of the small and mid-size banks in the US. Those with assets of US$ 10 bn or less find themselves most at risk. The construction loans outstanding at the end of December 2007 accounted for nearly 115% of the net worth of the smaller banks. Compared to this, for the big banks, construction loans represented only 43% of capital. Thus, in the event of such default, even the banking sector in the US may see some consolidation activity with the bigger banks acquiring smaller and troubled banks.

On the Indian shores, while the subprime instances have yet not raised any alarm, banks that have significant overseas exposure have already started facing the heat. India's second largest banking entity, ICICI Bank, has reported marked-to-market losses of US$ 264 m in its overseas operations on account of its exposure to credit derivatives and investments at the end of January 2008.