ANNUAL BUDGET 2016-17: MERA GAON MERA DESH

After sinking almost sinking 500 points, Sensex has recovered by about 150 points by the time I started writing this blog. It took almost one hour to do that as the market had to digest the fact that it is not at all a ‘suit boot ki sarkar’. The theme of the whole budget was agriculture and rural development followed by social security schemes and infrastructure. The government aims to double the income of the farmers by 2019. Emphasis is laid on fast tracking irrigation projects, increasing cultivable area and more support to MGNRE scheme. Under rural development apart from budgetary allocations, two schemes have been launched to improve rural digital literacy to cover 6 crore households in the next three years. Laying more stress on these sectors were logical going by our monsoon track record of the past two years and falling rural consumption. For me personally social security schemes announced were the star performers with Rs. 2000 crore allocated for LPG connections in the name of women members and the health insurance scheme of Rs. 1 lakh for the BPL families. Infrastructure got a boost with Rs. 55000 crore allocation and Rs. 15000 crore for NHAI through bonds.

Though lot of incentives has been given for the Make In India and Job creation and skill development, the stock market remained unconcerned. The moment, the Finance Minister announced recapitalization of Rs. 25000 core, it went for a toss. They expected more pocket money, when everybody else is doing why can’t we?  Well, I think whatever is done is definitely in consultation with the RBI and there would be a substantial road map for that and FM has reiterated that if need arises sufficient support will be provided for PSU banks. And the best part was the indication given by the government that it may be ready to reduce its stake in PSU banks starting with IDBI bank. So why did the market fall? Well we are soo good in knee jerk reactions. And the other reason is the dividend distribution tax of 10% for the recipients who receive more than Rs. 10 lakhs as dividend, this is fair enough and also tax on crorepatis increased from 12% to 15%, so WHAT, you guys need to pay. See there are still 13000 villages in this country which need to be electrified.

Last but not the least our FISCAL DEFICIT, it has been curtailed at 3.9%, Congratulations and target stands at 3.5% for the next fiscal. So apart from the corporate, the Finance Minister was able to please everybody from Mr. Rajan to international rating agencies to farmers, women, middle and low income group people and of course our Prime Minister. Well, this was just a trailer, more analysis will follow in the coming blogs. I just hope there is a rate cut till then. Mr. Rajan, jo vada kiya wo nibhana padega…..   

RAILWAY BUDGET FY 16-17 – BEING HUMAN

The first thing that analysts started discussing immediately after the railway budget presentation was its operating ratio. 93.8 % in the current fiscal, for every 100 rupees earned by railways, Rs.94 is spent, chanted one of our esteemed analysts. Continuing with her quantitative analysis, she exclaimed, “Passenger and freight revenue targets have not been met, capital expenditure has been increased for the next fiscal that to 20% YOY”. I think she forget that for a change she has been asked to analyze Indian Railways, and not a mid cap company. Indian railways, a $ 25 bn industry catering to 8 bn people every year requires a separate individual annual budget, being the largest rail network in the world. 

Personally, I don’t remember any of the previous budgets bang on targets. So this budget is also following the normal trend year after year. But still a number of industry experts are optimistic for railways for the medium and long term. WHY? Qualitative aspects have been inculcated which will fructify only in the long run which number crunching analysts are unable to comprehend. And most of the industry veterans are happy with the fast decision making process over the last one year. 

Starting with the major thrust areas, common man’s needs were highlighted through initiatives such as Antyodaya Express (long distance fully unreserved), Deen Dayalu coaches (for unreserved passengers, added to long distance trains), Hum safar (fully reserved third AC ), Tejas (high speed train with Wi-Fi), bar coded tickets, 30,000 bio toilet and Wi-Fi at 100 stations which will be extended to 400 stations in the next two years. And the amazing part is that number of these initiatives were suggestions on MyGov platform.   

Next stop was at direct freight corridors (three) which will be commissioned and freight basket will be expanded. Instead of taking easy way out by raising passenger and freight fares, other revenue models will be adopted by railway ministry. In simpler terms, railways is on the right track to regain its lost market share which right now stands at 30% through freight rationalization and improving operational efficiency, faster decision making and quicker implementation of railway projects.

Though there is a long list of fresh initiatives taken up by Indian railways such as first auto hub in Chennai, 400 stations to be developed through PPP, overhaul of parcel business to help e-com sector, innovation fund of Rs. 50 crore etc etc…. The major bone of contention is how all of this is going to be funded and capital outlay stands at Rs.1.2 lakh crore for the next fiscal.   

It’s true that optimistic assumptions are made in this budget which appear unrealistic to some. But optimism is the main ingredient of success. And this time there is human touch to the whole exercise which a lot of people fail to understand. I don’t know about others but I feel that I boarded the right train in 2014.

ANNUAL BUDGET FISCAL 2016-17 – WILL HE, WON’T HE

Budget exercise by the largest democracy of the world deserves attention especially in the backdrop of global volatility, falling crude prices and erratic FII behavior. Media hype for the budget is justified in the present conditions especially after the third quarterly results of our PSU banks. In the last budget, fiscal consolidation was the major agenda with the specific laid out path till 2019. So, both domestic & global analysts along with dreaded international rating agencies are ready with their magnifying glasses to react before reading the fine print. Fiscal consolidation though need of the hour cannot be the sole driving force for annual budget of a country like India with a passive private sector and an entangled banking sector. As for the international rating agencies, they had downgraded USA in 2011 which is still the supreme growth engine of the world.

Coming back to our own fiscal deficit issues, higher fiscal deficit definitely leads to higher government borrowings spiking interest rates augmenting inflation. So this vicious circle has to be curtailed through fiscal discipline. But is it possible with latest seventh pay commission recommendations to be implemented along with higher capital requirements of public sector banks. In addition to that, the expected capital expenditure plans and various social schemes to be laid out for the coming fiscal would be a catch 22 situation for Mr. Jaitely. If he walks on the path of fiscal consolidation, it would be difficult to revive investment cycle so urgently required to pull India out of this morass of slow growth and get back to 9-10%. On the other hand, higher deficit will lead to higher government borrowings increasing cost of capital further hindering private sector participation.  

Whatever might be the case, we should not formulate our future growth with respect to whims and fancies of foreign portfolio flows or international rating agencies. China has already set an example that sustainable growth can be achieved only though strong economic model based on domestic consumption. We already have this model intact with strong macro fundamentals and pursuing this has helped us to weather global volatility. But right now we have to take a call between rapid debt fueled growth or long term sustainable growth through structural reforms.    

SUPREME COURT TO RAJAN: MAIN HOON NA

Till now Raghuram Rajan was fighting a lonely battle, but now he’s got company. Last month, our RBI governor gave a stern message to borrowers misusing public funds and still spending lavishly. But nothing happened as he was completely over ruled by our esteemed economic advisor Mr. Subramanian and few other well wishers of the banking sector.  Now can our CEA tell the highest court, ‘ Sir we can handle it. It is our job’. He cannot because things have got out of hand. SC court has every right to ask how the banks have accumulated huge non performing assets and losses. Public sector banks are known for their credibility as they represent the government and the public at large believes in them and thus they still represent 70% of the banking industry.

Though banks were nationalized in 1970s, financial inclusion process for the common man is still going on. People who have trusted the PSU banks by depositing savings of their lifetime got a rude shock owing to plummeting value of banking stocks due to skyrocketing NPAs, provisions and declining profits. The present government has been trying for a while with ‘Indradhanush scheme’ launched in the last Gyan Sangam. But it will take a lot time, effort to cleanse the entire system and not to forget the pain the investors and banks themselves have to go through as dirt has been lying there for years now.

As for now, the Supreme Court took notice of this Swachh Banking Sector Abhiyaan undertaken by the RBI and the government and wants to be a part of it. Thus has asked RBI to give a list of defaulters on loans of Rs. 500 crore and above it in the last five years. And if the Supreme Court becomes a part of it, Swachhata Abhiyaan will be 100% success. If in doubt go back to 2012 and refresh your memory.

FOR  A  BULL  RALLY  LET  THE  PARLIAMENT  FUNCTION

So the market is recuperating, like me. It’s a real nice feeling, as for the stock markets this feeling gives faith and hope to small retail investors that things will improve and so let’s move on. Many analysts have termed the last few days stock market movements as a bear rally. How do we understand that? After bulls now bears are also rallying….. too much ho gaya yeah to… First of all we are not able to understand why one fine day, the bulls start rallying, without any reason. We have to break our heads. Okay Draghi said something…. Okay.. Yellen didn’t say anything. Mr. Kuroda did something. Last but not the least our Prime Minister wants to do so something….. and the bulls start without knowing where they are heading….. pretty funny…. but complicated too.

What ever is this bear rally…. Informed investors can sell some of their unwanted stuff and re-balance their portfolios. Okay now the best news over the last two days. OPEC and Russia have come together to freeze their output to January levels to improve crude prices. Iran and Iraq have also welcomed this move without committing any output levels. This is a big step by oil producing countries and will definitely yield results in the long term. Though speculation is rife that all members may not honor this commitment going back to what happened in 2001, things are really bad this time and OPEC members and Russia might have to stick together for reducing their budget deficits and improving market share. You never know, shale oil producers might give tacit support to this agreement and we may see oil in the range of $ 50 by the year end.

As for us, just four days for the budget session to start and then getting stalled for no reason. Please tell them to let the parliament function and pass important bills so that we can have a real bull rally for valid reasons.

PSU BANKS: SHOWING INDRADHANUSH COLORS

So its definite now, our stock markets are going through anxiety. There is no other way of defining it. Positive opening was expected after Reserve Bank of India and the Government together came out to defend and support PSU banks. But not 600 points, it is the biggest intra-day gain since May 2014 and Bank Nifty up by 3.4%!! So we are good now. All PSU banks are up and making smart intra-day gains, especially Bank of Baroda rising by some 26%. It shows nothing but absolute faith in the system. But how did we arrive at this dreadful juncture with the losses of thousands of crores and NPA ratios in double digits. Almost 5.64% of total advances of PSU banks constitute gross non performing assets till September quarter?

Actually our PSU banks stopped celebrating Diwali some 12-13 years ago. No Diwali, so no clean up sessions, unwanted stuff kept bundling up, till Mr. Rajan came on the scene and extended Swachh Bharat Abhiyaan to banking sector and also gave a time frame i.e everything should be spic and span by March 2017.  And so it all started with asset quality review of PSU Banks, confirming the dire state of government sector banking. These government banks are not the only one’s to blame, a major part of it goes to our political machinery forcing them to lend at lower rates, even below their base rates to support infrastructure and power sector as no contribution came from private banks during 2008 crises. In addition to that, political interference in decision making made matters worse resulting in poor credit review, accumulation of highly risky portfolio, huge provisions and low profitability.

Fast forward to third quarter FY16, as per RBI directions, PSU banks decided to clean up their books in the last two quarters of this fiscal and thus whopping provisions and soaring non performing asset ratios. Bank of Baroda is the only PSU bank which has completed its asset quality review in December quarter and is promising 20% growth next fiscal and without equity dilution which justifies its intra-day gain today. With respect to capital infusion from the government, all PSU banks do not require it and can meet BASEL III norms once the cleaning session is over and they would be galloping towards growth again.

So this time we are really going to celebrate Diwali especially PSU banks as luckily we have our RBI governor and central government which believes that cleanliness is not only godliness but also growth.  

NO GLOBAL MELTDOWN FOR US: RBI UNDERTAKES SWACHH BANKING SECTOR ABHIYAAN  

It was a different Thursday altogether, at least for the stock markets. MadamYellen’s testimony reiterated what future is going to look like for global financial markets. Volatility is going to be the basics for stock markets world over. Her statements made it clear that central banks themselves are on an uncertain path and all policy decisions for the US FED are going to be relative to both domestic and global developments for next March meeting. US Fed meeting coincided with bank results in Europe and thus market turmoil worsened. But the actual culprit is Mr Kuroda and his negative interest rate policy leaving financial markets stumped as Japan also started following below zero interest rates similar to European countries already in recession.

But what happened to us. Okay rest of the world also had a hard landing but our indices lost more than 3% in a single day. This time it’s just not them, it is also us. Sate Bank of India came up with its quarterly results with a 70% fall in profits and provisions going up by a whopping 60% YOY and 83% QOQ. That was disastrous and unexpected by the markets. Though the rest of PSU banks were giving poor results with Dena bank, Allahabad bank and IOB even reporting negative quarterly profits, SBI’s quarterly performance was like last nail in the coffin.

Our Governor at CII’s banking summit yesterday did his best to put issues at rest with respect to Indian banking sector. RBI duly supported by the central government is on a clean up drive which might be painful in the short run but was long overdue. Since, 2008 crises, PSU banks were forced to lend heavily to power & infrastructure sector and even below their base rates. Although banks are in better position since then especially with respective to administration and decision making process with change of guard at center, old cobwebs have to cleaned, unwanted stuff has to be discarded to let in new hope for the future. Without this clean up, growth would be very difficult for public sector banks which still accounts for 70% of the total banking sector. Any major infrastructure or power project in India is financed by consortium of PSU banks. Thus economic growth would be hindered, if our PSU banks are not fully healthy and financially sound.  These quarterly results with high provisions and low banking profits should be viewed as an aberration and not a regular feature for our banking sector. Mr. Raghuram Rajan has put Indian banks on an irreversible path of growth and stability and we should pray that either his term gets renewed or he joins the government.          

GLOBAL STOCK MARKETS NEED THIS PANIC ATTACK

Another meaning for the word panic is anxiety. It is one of the most dreaded word these days. And now even the pink papers and our media savvy analysts are using it so loosely these days. “ There is panic in global equity markets”, “Investors are panicking”. “ Stock markets have a panic start”  blah… blah….  Are bhai theek hai…… India is not having a panic attack. We are just reacting to what other economies are going through. And this reaction is due to liquidity issues faced by FIIs and various other global systematic risk factors.

Panic is an overwhelming feeling of acute anxiety. Anybody going through this would be either depressed or aggressive; it can be anything which defines unsettling or volatile behavior. So our stock markets are going through this. Our global economy is reacting like a human body, a single twitch in any part of the body gives a feeling of a heart attack or nervous breakdown. Looking at oil prices everyday is just like checking your pulse every five minutes to see if your heart is still pumping. Waiting for US Fed rate hike is like getting your ECG done every quarter. So what do we do? Waiting for new symptom everyday will not help?  So let’s first accept the fact that the global stock markets are having a panic attack. This is just a symptom that there is something wrong with our world economy. Every major economy right from US to China, Japan to Brazil are trying to set things right for whatever excesses they have committed before 2008. Without this mayhem governments and central banks all over the world would not have recognized the importance of stringent and transparent regulations. Even our own banking sector is on the mend and would have to go through the clean up session to emerge stronger and make our economy even more resilient.

As for retail investors, this panic attack is a blessing in disguise. Accumulating fundamentally strong companies at cheap valuations will help investors in attaining long term profitable portfolios.  India being fundamentally strong economy should just stay clam and wait for the parliament session to start, budget to be presented and other important bills to be passed as only fundamentals create wealth.

GOVERNMENT'S FISCAL DISCIPLINE KEY TO FIGHT GLOBAL UNCERTAINTY

Uncertainty is the only certain factor for financial investors these days. US job data came on Friday with unemployment rate falling to 4.9%, 8 year low since 2008.  Markets should cheer like a jumping jack but nothing happened as such. Though stock markets opened positive, most of them closed negative by falling 1-2%. Number of jobs added in January stood at 151,000, way below 262,000 and 280,000 in December and November respectively. So analysts are worried about this falling trend. Though there has been decent increase in wages, slower job creation over the 2-3 months has transmitted mixed signals about the US economy.  

And everything rounds up to just one thing, whether there is going to be a rate hike or not in March by US Fed. Madam Yellen’s semi annual testimony on Wednesday is expected to give some cues of what she has in mind, as a result, stock markets are on tenterhooks…… Do retail investors need to worry about what happens with US Fed cutting rates or ECB continuing with its spoon-feeding. Yes, it does affect, India can no longer be isolated or ignored by the global financial community. Foreign portfolio inflows will see-saw according to global financial volatility index. What should concern us more is what is happening in our own home with respect to coming budget, pending bills in parliament, inflation data etc…..

Our RBI Governor has already warned the central government to be on the path of fiscal consolidation. Higher fiscal deficit will not only increase inflation but will put a question mark on NDA’s credibility as reform process is already slow. Thus, Modi government is definitely expected to fulfill its agenda of fiscal discipline in the coming budget. Lower fiscal deficit will control inflation giving more power to RBI to cut rates, strengthen Indian rupee and of-course encouraging retail investors to take adequate risk by providing stable economic environment.   

   

RBI’S  SIXTH  BIMONTHLY  MONETARY  POLICY – NO AIRLIFT, WE ARE STILL STUCK

Not being in the best of my healthy spirits, I missed writing my blog for the last monetary policy meeting for FY 15-16. Though I had decided to read ‘Wuthering Heights’ to calm my nerves, I ended up reading anything and everything related to the latest policy review.  I think whatever I felt got transmitted to our stock markets as they fell both on the policy day and day the after. Don’t worry I am not trying to find any co-relation as there are soo many factors to co-relate including our own Indian cricket team.

Although the policy was pretty expected, the statements made by our governor with respect to structural reforms which the government has to undertake in the coming budget, to give the RBI its happy space to cut rates spooked the markets. You can’t blame him actually as most of the stock markets world over declined both on Tuesday and Wednesday for mundane obvious reasons. And on Thursday everything was fine including me.  So we have our repo rate still at 6.75% which might be reduced by some 25 basis point, if circumstances do allow. Here circumstances refer to both global and domestic, inflation data which is due in a few days and how the central government implements 7^th pay commission recommendations. With respect to liquidity concerns, RBI pledged to take action by timely infusion of liquidity through OMO’s and on the whole call markets rates are in tune with policy rates.

So in the end our Governor has invited Mr Jaitely for a long walk together. Mr. Jaitley you are so lucky, there are so many out here dying to be in your shoes. 

RBI  MONETARY  POLICY  WOULD  BE  STEADY  YET  UNPREDICTABLE

It’s almost two and a half years now that we know Mr. Rajan, our RBI Governor. So we can foretell that he is not going to cut repo rates tomorrow. Has he become so predictable or volatile economic environment everywhere has given a sense of certainty to every central bank policy except of course Bank of Japan which surprised everyone. Let’s skip the reasons for the present uncertain world economy as it has become too boring to discuss and instead just give a thought to all the major monetary policies undertaken from the beginning of this year.

Starting with Mr. Draghi, he kept rates unchanged but signaled higher stimulus package from March. Madam Yellen did the same thing and her future guidance of quarterly interest rate hikes in 2016 looked hazy. Both these monetary policies made stock markets rise and shine after the first two volatile weeks of January. But nothing could match the Japanese monetary policy which adopted negative interest rates to give a kick to its economy slowly moving into slumber.

Alas! Mr Raghuram Rajan is not going to match up to them. He is used to doing difficult things and saying no to the whims and fancies of various interest groups and pundits of world economy. He has already reiterated that the government should follow the path of fiscal consolidation and that debt fueled growth would be hazardous for India in the long run. But taking into consideration government efforts in power sector and ‘Start Up India’ program, he might just give the much required space to the central government to maneuver fiscal consolidation with its budgetary targets. As he only said in his first speech, as RBI governor, “a central banker should never say never”.