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Will India Inc See A Spring Soon?

We will have to wait and watch as to how “co-operative federalism” and “political management” plays out. But if play gets underway, we are in for good time

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As the Winter Session of Parliament unfolds, what can’t be missed is that if the Centre manages to get its play in order -- and the Opposition, hopefully for this once does not act cussedly -- there’s every reason to believe we are on the cusp of good times.

Let’s take the big catalyst we have on our hands – the 7th Pay Commission (PC). “The actual payment should be in the June quarter. Note that the consumption stimulus will persist for 2-3 years as the Award is implemented by state governments, state-run undertakings and universities. On our part, we continue to see a consumption recovery of one per cent of GDP driven by lower lending rates, household saving of 0.4 per cent (of GDP) and the hike in wheat prices (five per cent done) to implement the Swaminathan formula before the February 2017 UP polls”, says Indranil Sen Gupta, India Economist at bank of America-Merrill Lynch.

It Can Help Fire The Economy
Now the 16 per cent hike in government salaries was on expected lines; what’s been a let-down of sorts is while the housing loan limit has been hiked to Rs 2.5 lakh from Rs 0.75 lakh, the car-loan advance (Rs 18,000) has been abolished. “This will mean a boost to consumption that will largely be spent on consumer discretionary items and housing”, says Gupta. Be as it may, in these troubled times, it still is a fillip in demand for the same; and if bank lending rates were to fall further, it will be a double bonanza. The payment towards One-rank-one-pension is a new variable – it will add heft.

“The Pay Commission’s recommendations have the potential to add to the purchasing power of households which should help to prop up demand, though admittedly it would be seen during the course of fiscal when it is implemented. This along with the government’s own capex programme would help in accelerating growth. The government will have to take a closer look at the fiscal numbers given the pressure of making provisions for the same and moving along the path of fiscal consolidation”, says Madan Sabnavis, chief economist at Care Ratings.

“The recovery in the Indian economy is still fragile. Further, deficit rainfall and subdued rural demand poses another threat to the recovery process while retail inflation has edged up led by higher prices of food. Muted investments, weakening rupee and slower than anticipated pace of reforms has tempered the confidence of the business community in the recent period”, says Arun Singh Senior Economist Dun & Bradstreet India. He states that while the government has taken certain measures to revive investment and ensure flow of funds to infrastructure projects, the government needs to proactively take the reform agenda forward. “Progress of the winter session of the parliament is expected to impact the business optimism and revive investor confidence in the short term”, he says.

It’s A Mixed Bag Really

  • The index of Industrial Production moderated to 3.6 per cent in Sept-15 after a thirty-four month high to 6.3 per cent during Aug-15.
  • During Sept-15, mining (3.0 per cent) and manufacturing (2.6 per cent) moderated as against 4.2 per cent and 6.6 per cent respectively in Aug-15 whereas, the electricity sector witnessed a significant growth of 11.4 per cent in Sept-15 as compared to 5.6 per cent during Aug-15.
  •  The capital goods sector continued to grow in double digits for the third month in a row to 10.5 per cent during Sept-15 whereas, intermediate goods sector moderated to 2.1 per cent in Sept-15 from 3.1 per cent during Aug-15.
  • The consumer non-durables sector witnessed a decline of 4.6 per cent during Sept-15, thereby leading to a moderate growth in the overall consumer goods segment by 0.6 per cent in Sept-15.
  • During Sept-15, the eight core industries grew by 3.2 per cent (y-o-y) as compared to a growth of 2.6 per cent (y-o-y) in Sept-14 due to significant growth in production of fertilisers and electricity.
  • The WPI inflation consecutively declined for the twelfth month in a row to 3.8 per cent during Oct-15.
  • Inflation in food grains registered a significant growth of 9.2 per cent in Oct-15 as against a growth of 3.3 per cent during Oct-14 on account of elevated level of inflation in pulses.
  • Inflation in non-food articles witnessed a significant growth of around 5.1 per cent in Oct-15 as against 2.6 per cent in Sept-15.
  • Inflation in fuel and manufactured articles declined by 16.3 per cent and 1.7 per cent respectively during Oct-15 from a moderate growth of 0.5 per cent and 2.5 per cent respectively in Oct-14.
  • Retail inflation in rural and urban sectors moved upwards to 5.5 per cent and 4.3 per cent respectively in Oct-15 from 5.1 per cent and 3.6 per cent respectively during Sept-15.
  • The aggregate deposit and bank credit grew by 11.1 per cent (y-o-y) and 9.0 per cent (y-o-y) respectively in the week ended Oct 30, 2015 as against a growth of 11.2 per cent and 10.7 per cent in the year-ago period.
  • During Sept-15, deployment of bank credit to agriculture (12.8 per cent), micro & small, medium and large industries (4.9 per cent) and priority sector (10.9 per cent) moderated significantly as against a growth of 18.8 per cent, 5.9 per cent and 15.8 per cent respectively during Sept-14.
  • However deployment of bank credit in service (5.9 per cent) and personal loan (18.0 per cent) sectors grew during Sept-15 as compared to 5.0 per cent and 13.5 per cent respectively in Sept-14.
  • India's exports and imports declined by 17.5 per cent (y-o-y) and 21.2 per cent (y-o-y) to $21.4 bn and $31.1 bn respectively during Oct-15 leading to a trade deficit of $9.8 bn
  • Non-oil imports declined by 9.9 per cent to $24.3 bn during Oct-15, whereas oil imports declined significantly by 45.3 per cent to around $6.9 bn.
  • External Commercial Borrowings/Foreign Currency Convertible Bonds stood at around $2.6 bn during Sept 15 registering a decline of 17.7 per cent on a y-o-y basis.
  • FII invested around $3.4 billion during Oct-15 as against an outflow of around $0.9 billion in Sept-15.

What Are The Spoilers?
Fitch expects Indian banks’ stressed-assets ratio to improve only gradually from the recent high point of around 11 per cent. “These legacy issues are likely to hamper the’ ability to internally generate capital at a time when Fitch estimates that the banks would require around $140 billion in total capital to ensure full Basel-III implementation by fiscal 2019. The government has been drip-feeding some capital into its banks, but also expects the banks to access the market for the remainder. However, the challenge arises from market depth and appetite being constraining factors in raising the required amount”, explains Saswata Guha, Director-Fitch Ratings.

There’s nothing that the NDA can do on this front – bank’s can’t be coerced to lend; worse they are in position to take on that role given the premium place on capital ahead of Basel-111.

As to whether the current session of Parliament would be a washout, your response will depend on which side of the political debate you are on.

But let’s revisit Kotak Institutional Equities note. On 9th November -- a day after the Bihar verdict -- Kotak opined: “We would construe the outcome of the Bihar elections as another endorsement of Indian citizens’ desire for economic development and better governance rather than a negative referendum on the economic policies of the central government”. It went on to add “the state government in Bihar has had a good track-record on development and governance over the past 10 years; in fact, the BJP used to be an ally of the JD(U) for a larger part of the past 10 years”. Read carefully, it in effect says the BJP and JD(U) were and are on the same page as far as development is concerned.

As for the strategy aspect, the Kotak report was of the view the government may have to rely on (1) cooperative federalism (“something which the Prime Minister has championed anyway”) and (2) political management to reinvigorate legislation at the central level. That even certain executive reforms will require the support of the regional political parties as the central government does not have the authority to legislate or decide on several economic matters. “We see the recent power distribution sector reforms as the right way to resolve difficult economic issues. The central and state governments have jointly decided on a package of reforms for addressing the challenges of the power distribution sector”, it said.

We will have to wait and watch as to how “co-operative federalism” and “political management” plays out. But if play gets underway, we are in for good times.