Barring major Asian stock markets, the global stock markets witnessed losses this week. The debt crisis in Euro zone weighed heavy on the market sentiments as disagreement continues between France and Germany over the formation of a banking union to overcome the debt burden faced by the euro zone. However, post the announcement by Spain regarding budget cuts to control the rising debt pressure, the market confidence recovered. It was further lifted on hopes that China will soon announce monetary easing measures to boost economic growth.
The Indian equity markets witnessed a decline during the early part of the week. However, with Spain announcing plans for economic reform, the markets recovered on Friday (up 1.0%) and ended the week with a marginal gain of 0.1 %. Boosted by the economic reforms announced by the Government, rupee gain and positive news from Spain, BSE-Sensex soared to 14 month closing high this week.
Amongst the other markets, China (up 2.9%) was the biggest gainer followed by Hong Kong (up 0.5%). The others ended the week in the red with market in Brazil (down 3.5%) and France (down 5.0%) leading the losses.
Now let us have a look at key economic developments during the week. The growth in the eight core industries (37.9% of weightage in the overall Index of Industrial Production /IIP) has slipped to 2.1% in the month of August (versus 3.8% in the same month last year). The performance was weighed down mainly due to the contraction in natural gas, fertilizers and cement. The data confirms a slowdown in the economy. The cumulative expansion of these industries (crude oil, petroleum refinery products, natural gas, fertilizers, coal, electricity, cement and finished steel) in April-August 2012 slowed to 2.8% from 5.5% during the corresponding period a year ago. However, May reading was marginally revised upwards to 4% from the previously reported 3.8% expansion.
In some more economic news, the government has retained its borrowing target in the second half of the fiscal year 2013 (FY13) and will borrow Rs 2,000 bn in remaining period of the current fiscal. The government budgeted to borrow Rs 5,700 bn this fiscal (5.1 % of the Gross GDP), including repayments. Out of this, it has already exhausted 65% of the limit in the first half of the fiscal. Though the finance ministry has admitted the possibility of fiscal deficit overshooting the target (maximum of 5.2% to 5.3%), it hopes that government's recent efforts to cut down spends would show results and has stuck to its budgeted borrowing plan for the remaining part of the year.
Now let us take a look at few corporate events that unfolded during the week. Tata Motors is planning to expand in Latin American markets by setting up an assembly facility in Mexico. For this, the company is planning to associate with a local partner which will help in building a network of suppliers. The company is likely to invest around US$ 100 m for the Mexico assembly facility. It will assemble Tata Vista, Tata Indica, Tata Manza, Tata Aria and Nano. If the company invests upto US$ 100m and pledges to build 50,000 vehicles or above, it will get some duty exemption as per the Mexican laws.
ONGC Teri Biotech Limited (OTBL), the joint venture between state-run explorer Oil and Natural Gas Corporation (ONGC) and The Energy and Research Institute (Teri), is planning to bid for Rs 150 bn desert oil slick clean-up contract in Kuwait. The Kuwait Oil Company has engaged a project monitoring consultant to prepare the tender specifications. The specifications could be ready by January 2013. The contract is to clear the oil slick created in the Gulf war following Iraq's invasion of Kuwait in 1990. The contract being a USD $3 bn project, OTBL might have to use ONGC's balance sheet to be eligible to bid for the project. ONGC has a 49.9% stake in OTBL, while Teri's stake is 48%.
Now, let us discuss some developments in the pharma space. The Group of Ministers (GoM) on pharma chaired by Agriculture Minister Sharad Pawar, has finalized drug pricing formula. It has proposed for fixing maximum retail price (MRP) of 348 essential medicines at the average price of all brands in a segment that has more than 1 % market share by sales. The draft of pricing policy is likely to reach Union Cabinet by next week for seeking approval. All the 348 drugs with 614 dosages of each and other combinations of medicines as mentioned in the National List of Essential Medicines (NLEM) are included in the draft for price control. If the proposal gets passed, the prices of several costly brands will come down. It will also allow low-cost medicine manufacturers to increase their prices. As a result of this development, pharmaceutical companies may witness their margins trim down, as the span of price control will cover around 30% of Indian pharmaceutical market.
In a recent development in power sector, the Government has approved restructuring of Rs 1,900 bn debt of state electricity boards (SEBs) to turnaround the almost bankrupt power distribution firms. As per the scheme approved by the Cabinet Committee on Economic Affairs (CCEA), 50% of the short-term outstanding liabilities of power companies would be taken over by state governments. The remaining 50% would be would be restructured by providing moratorium on principle and best possible terms for repayments. The package also offers incentives to SEBs to reduce their transmission and distribution (T&D) losses. If implemented, it will immediately reduce interest costs which make up over a third of distribution companies' losses. The recent tariff hikes by distribution companies along with lower interest expenses and cut down in T&D losses is likely to improve the financial standing of SEBs.
After rolling out reforms regarding foreign direct investment (FDI) in multi-brand retail and aviation and debt restructuring for state electricity boards, the Government is now shifting focus to insurance sector and is keen on raising the FDI cap in the sector to 49% from the existing 26 % limit. While the reforms undertaken so far are significant, investors are hoping for more such policy changes like reforms in the goods and service tax and land acquisition bill. All these would decide the future course of Indian stock markets.