Fiscal fallacy, labour crunch & more - Views on News from Equitymaster

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Fiscal fallacy, labour crunch & more

Jun 19, 2008

Move over pharma...now it is banking
As the margins in the generic pharma business get wafer thin, the lure of the burgeoning financial sector seems to be irresistible to the promoters of one of the largest drug manufacturing companies in the country. The promoters of financial services group Religare Enterprises - Malvinder and Shivinder Mohan Singh - who recently sold their 35% stake in Ranbaxy to Daiichi Sankyo of Japan for a consideration of Rs 100 bn, have proposed to seek a banking licence from the RBI. Entry into banking sector may seem to be a natural progression for the non-banking financial company (NBFC), given the strict capital adequacy (CAR) norms recently imposed by the Reserve Bank of India (RBI) on such structures. However, what needs to be kept in mind is that the banking regulator has not issued too many licences in the recent past. While Yes Bank was the only one to have received a greenfield banking license, Kotak Bank was the only NBFC to be converted into a bank in the past decade. Further, banking rules in India do not allow a company to hold more than 10% stake in a bank. This has dissuaded large corporate entities from acquiring minority stakes in banks. In the banking sector itself, net interest margins have got squeezed with the entities having to park a larger sum in the form of CRR (cash reserve ratio). However, Religare has the advantage of already having a large customer base through its equity broking and financial services businesses that it can tap for cross-selling its banking products.

  • Read our view on the Ranbaxy Daiichi deal

    No worry, special securities are here!
    In the early 90s, the government provided thousands of crores to public sector banks to beef up their net worth. The banks, in turn, used the money to buy government bonds of the same value. The biggest advantage that came to the government out of this deal is that these bonds issued for a special purpose were not reckoned as part of the government's annual borrowing which is undertaken to bridge the annual fiscal deficit gap. The lesson learnt in the 90s is again helping them to keep their fiscal deficit targets under the FRBM Act (Fiscal Responsibility and Budgetary Management), and yet indulge in populist measures (subsidies and duty cuts).

    As per government sources the total value of outstanding bonds issued to oil companies, Food Corporation of India and fertiliser companies is to the tune of Rs 1,000 bn. These special bonds do not qualify for investment by banks to meet their SLR (statutory liquidity ratio) and thus find their way to the investment coffers of pension funds, provident funds and insurance companies. This leads to crowding out of more productive borrowers from the market. However, what we fail to notice is that whether the bonds are accounted for in the budgetary books of the government or not they do have a fiscal cost attached to them. The government's claims of meeting the FRBM targets, have but to be taken with a pinch of salt!

    Talk about manpower shortage
    Rice growers in Punjab, India's 'grainbowl state', couldn't have had it worse. Two days after the sowing season began, they are grappling with a shortage of manpower to plant the crop. A decline in Punjab's rice crop, which includes the exportable basmati variety, would hurt the entire nation, already battling soaring food prices that have pushed up the inflation rate to a near four-year high. Punjab is the largest contributor (37%) to the central rice pool, which is the stock purchased by government agencies for nationwide distribution and contributes 11% of the total national production. So far, farmers have managed to plant the crop in less than one-third of the state's targeted acreage. The government has also proposed to avert the crisis by offering the farm labourers free travel during the sowing season.

    Sowing expenses have shot up because of the labour scarcity. The per hectare cost of planting rice has jumped to Rs 850 from Rs 600 last year. More job opportunities in industrial belts in northern India and the National Rural Employment Guarantee Scheme, which offers 100 days of employment a year to one member of poor rural families, have been held responsible for the decline in the arrivals of farm hands from Uttar Pradesh and Bihar. Around a million extra hands are required during the crop sowing season, and the state is almost totally dependent on manual labour with its failure to modernise farming.

    RBI leans against 'irrational wind'
    ...so says HDFC Bank's MD and CEO Mr. Aditya Puri. With the global financial turmoil leading to examination of the roles and responsibilities of regulators, their resistance to "irrational exuberance" has been put to test. Traditionally the central bank's role has been to use the monetary tools to manage the terrible trio of inflation, exchange rate and growth. However, this is set to change with financial disasters becoming too large to handle and significant parts of the markets being outside the central bank's direct control. RBI, however, has from the beginning been very proactive in its role of 'leaning against the irrational wind'. Whether it was aggressive consumer lending, retail asset delinquencies or borrowing against securities, each time the central bank has shown its diligence by dissuadng the borrower and the lender through measures such as tightened liquidity, higher provisioning and limiting exposures. This has lent the Indian financial sector better visibility in the midst of turmoil.

  • RBI's independent thought process

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