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Serious fiscal risks and more...

Aug 14, 2008

Economic Advisory Council cites 'serious fiscal risks'
Far fetched from the targeted double-digit figure, India's revered GDP growth number is expected to inch closer to 7% as against the earlier projected range of 8% to 8.5% for FY09. In its economic outlook for FY09, the Prime Minister's Economic Advisory Council has projected a lower GDP growth rate of 7.7% in FY09. The council has also attributed the cause of the same to a tight monetary stance to bring down inflation to the range of 8% to 9% by early 2010. What is infact particularly perceptible is the fact the panel has cautioned of 'serious fiscal risks' and inability to meet the fiscal deficit targets due to adverse global economic environment, widening current account deficit and subsidy bills. It has added that the risks were arising from growing off-budget liabilities estimated to touch 5% of GDP by FY09.

Bankers and government welcome reforms
The exit of the Left Front from the Centre seems to suggest more than meets the eye. This is particularly true in the case of the banking and financial sector. And we have several instances to support this contention. The past five years have witnessed the Reserve Bank of India (RBI) suggesting roadmaps galore for bringing the Indian banking sector on a comparable platform to its global counterparts. However, most of the reforms were stalled for want of the government's nod. It is only now that we can see progress on several quarters.

  • Private bank promoters keen on cashing it out: As the RBI's 2009 roadmap of inviting foreign investment in Indian private sector banks draws nearer, bank promoters are getting more hopeful on cashing it out, even if partially. While there are signs of growth tapering and margins shrinking for most banking companies, bankers are adopting a cautious and patient approach. This is in view of the fact that they need to keep the fundamentals intact to lure foreign buyers. The CEO of a leading private sector bank has been quoted in a business daily opining that by 2010, there will be more clarity on permitting significant foreign investment in Indian private banks. The bank considers that the apt time to invite a strategic partnership and will look at partially offloading some promoter stake.

  • Government also doing it, but subtly: The SUUTI (a quasi government body) offloading 21% stake in Axis Bank was just the beginning. The Indian government has quietly set the ball rolling for banking sector reforms by seeking bankers' views on reducing its stake in public sector banks. Under the law, government stake in these banks, which account for about 70% of the industry, cannot come down below 51%. The Narasimham committee, had in 1998, recommended bringing down the government's stake to 33%. Since then, the issue has been discussed and debated at various fora, but successive coalition governments have not been able to move ahead with the proposal. According to the IBA estimate, banks collectively need fresh capital worth Rs 1.5 trillion in the next few years to support their credit growth and comply with Basel II.

  • Policies falling in place: Acknowledging the need for consolidation in the financial sector, the government has proposed to exempt the merger of financial institutions such as banks, insurance companies and pension funds ordered by the regulators in public interest, from the scrutiny of Competition Commission. The commission could typically take up to 210 days to decide the fate of such mergers. In order to facilitate quicker consolidation of weaker entities, this regulation could make the beginning.

  • Also read - Reforms can do it

    Cost cutting is the mantra
    While this may not sound novel, what is novel is the fact that companies across sectors are taking this more seriously and tapping on novel methods to reduce costs and save margins. Automakers had already started switching to cheaper alternative materials and energy-efficient equipment to save raw material and power costs. But now, they are also looking at alternative menus to cut down canteen subsidies; asking employees to leave factory on time. Companies are using bigger trucks, smaller packages to reduce logistics costs. A large automaker has decided not to use external trainers but use some of its own employees to train others.

    Indian retailers, with wafer thin margins, are looking at ways to trim expenses and protect their profits. One of the country's largest retailer has begun integrating the management, marketing, HR and IT departments of its units into one. The company says this one step will help it save around Rs 1.7 bn a year. This essentially means the company will have a common HR team, IT team and one management for all its business units. Further, companies are also planning to prune advertising budgets and cut packaging costs.

    Real estate companies that have been one of the worst hit in the slowdown are asking the construction workers to work extra time. Some others are using ready-made construction parts to save on expenses.

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