There seems to be a lot working in favour of the Indian economy these days. The latest in the offing is early arrival of monsoon. But before that the fiscal deficit number for FY10 has already brought in some relief. Fiscal deficit data for FY10 has come in lower than budget estimate, albeit marginally. At 6.6% of GDP, it is a shade lower than the projected figure of 6.7% of GDP. The key to this cut back has been lower government spending on rural employment.
Given the stress the richest economies are going through, there is no getting away from the need to rein in India's fiscal deficit. Agreed, we cannot do it abruptly. Especially, given that the economy is yet to recover fully. But we need to make a beginning. However, we are not sure that rural employment is the best place to crack the whip. Oil, fertiliser and food subsidies are the most obvious examples of fiscal folly. Numerous expert committees have repeatedly shown how the subsidies do not benefit the poor. On the contrary, they lead to sub-optimal use of resources. However, they continue to find a reasonable place in the budget year after year.
The bumper 3G telecom licence auctions that raked in Rs 677 bn proved to be a bonanza for the government. It will further aid fiscal prudence in FY11. Drawing cues from this, S&P has already upgraded India's rating to 'stable'. It now believes that unlike the US and Europe, India's weak fiscal profile will soon get corrected.
The risk of an overshoot on targeted deficit however, remains. This is given the aggressive disinvestment plans. Raising petroleum prices remains an option. But only to a limited extent.
A good monsoon could however solve most of the problem. Subsidies relating to agriculture could easily be done away with. The same will also put money in the hands of rural population. Manufacturers will demand lesser fiscal incentives with a steady churn of inventory.
Thus monsoon, 3G auctions, disinvestment and oil price hikes put together, India may see better fiscal numbers in FY11. For once atleast there is hope that the economy is very unlikely to go the Greece way.
Indian banks losing the quality edge?
Indian banks these days earn the envy of global banks. And why not? At a time when global banks are strapped for liquidity these are well capitalized. At a time when banking profits are associated with trading, these banks are lending profitably. However, a closer look at their numbers will tell you that all is not well.
The numbers are reminiscent of the previous rate hike cycle. The overall asset quality of Indian banks has started deteriorating. The Indian entities endured a long and painful exercise of cleaning up their asset quality. However, they are once gain facing problems sustaining the same.
The latest RBI data shows that the Indian banking system's gross and net NPAs have risen by 50% YoY and 25% YoY respectively. This certainly is a cause for concern. Banks can distort their NPA proportion by growing assets aggressively. But unless the check the quality of growth, their profits are sure to get eroded.
When entities globally are looking up to the Indian banks and their regulator, the latter could atleast do themselves one favour. Not do away with the quality edge that has rescued them in times of crises.