Sensex tanks over 300 points

The benchmark index posts its biggest daily fall since May 2012; The Nifty slips 90.80 points 

 

  

A file photo of the Bombay Stock Exchange. The benchmark index fell 1.8% on 16 May 2012. Photo: Abhijit Bhatlekar/Mint 

 

                    Mumbai: Indian shares posted their biggest fall since May 2012 as bank shares such as  ICICI Bank Ltd fell a day after The Reserve Bank of India data showed loan growth was still a concern and on weakness in global shares due to worries over the US Fed slowing its bond-buying programme. Shares of ICICI Bank fell 3.77% while those of State Bank of India were down 1.84%. The 30-share BSE index, Sensex, fell 1.62%, or 317.39 points, to 19,325.36, posting its biggest daily fall since 16 May 2012 when the index fell 1.8%. The 50-share NSE index, the Nifty, slipped 1.53%, or 90.80 points, to 5,852.25. Reuters

 

TOUHIDHUSSAIN

PGDM 2nd SEM

IIMT COLLEGE OF MANAGEMENT

A Budget in the shadow of record current account deficit

Managing the current account deficit has to be at the centre of the budget and this strategy has to be two-pronged 

 

The problem is that the current account deficit is high at a time when investment is very low, which means that increasing investment, which is needed to boost growth, runs the risk of inflating the external deficit. Photo: Mint 

                      the second quarter of 2012-13 saw a current account deficit of 5.4% of the country’s gross domestic product (GDP). The third quarter is likely to see a current account deficit of around 6% of GDP. And just to remind everybody, the deficit was 3% of GDP in 1990-91, the year of the country’s worst balance of payments crisis. This year’s budget is being prepared under the lowering shadow of a record current account deficit.

                  Why is that important? Well, the Reserve Bank of India believes that the country’s sustainable current account deficit is 2.5% of GDP. It’s far above that level now and the massive gap has to be financed through capital inflows, which makes the Indian economy completely dependent on the kindness of foreigners. Any loss of confidence in India’s growth prospects, any lessening of global risk appetite and fund flows to the country’s markets could start drying up, dragging down the rupee and leading to a stampede for the exits. The price of imports would rise, inflation would go up, growth would slow, companies that have borrowed abroad will totter and we could see a vicious backlash. It’s a huge risk, as rating agency Moody’s Investors Service recently underlined. And don’t forget that we have the general elections in 2014, so political uncertainty is likely to weigh on inflows. The finance minister has only a small window of opportunity. He must make the most of it.

That means managing the current account deficit has to be at the centre of the budget. The strategy has to be two-pronged—taking steps to reduce the current account deficit on the one hand and ensuring that the confidence of international investors in the Indian economy is boosted on the other, so that capital inflows to cover the deficit are adequate.

The current account deficit is the gap between domestic savings and investment. But the problem is that the current account deficit is high at a time when investment is very low, which means that increasing investment, which is needed to boost growth, runs the risk of inflating the external deficit. A high current account deficit at a time of low growth also indicates that the problem is structural in nature. The finance minister can do little, in the short-term, to remove the supply bottlenecks that have led to higher imports, such as a shortage of coal, the increased use of diesel or the mess in iron ore. He can do little about oil prices or oil imports in the short-term, without affecting growth.

What can he do then? He could take measures to increase domestic savings. Shrinking the fiscal deficit is one way of doing that. That will also increase the leeway for the Reserve Bank of India to cut interest rates. But if the deficit is cut by reducing subsidies, it would lead to higher administrative prices, increasing inflation. Higher tax receipts cannot be taken for granted, because the reasons holding back growth are supply-side bottlenecks that will take time to resolve and the recovery is likely to be slow as a result. He could, however, go in for a tax on the very rich. Cutting non-plan expenditure is essential, but unfortunately a large part of the centre’s expenses are more or less fixed. In short, while it’s absolutely necessary to reduce the fiscal deficit and the finance minister has already indicated he’ll aim for it to be 4.8% of GDP in 2013-14, a large part of the improvement will have to come from non-tax receipts, such as divestments.

It is not just the government that needs to save more—the financial savings of households has gone down from 12% of GDP in FY10 to 8% of GDP in FY12. This trend has to be reversed, by giving more incentives to people to save in financial instruments. The finance minister must give sops for exports, which will improve the trade deficit. He could also increase the import duty on gold. And he could lay out the timeline for the implementation of the Goods and Services Tax.

What can the finance minister do to ensure that capital inflows remain robust? One, he could announce measures that would help the capital markets, which would support his divestment agenda and allow foreign institutional investors funds to flow into debt markets, lowering interest rates. He must try and get domestic investors back into the markets. And secondly, he could outline in his speech his agenda for further reform, such as the pension and insurance Bills, freeing up foreign direct investment further and making the tax code more investment-friendly. Finally, the markets will not take kindly to more populism.

Ultimately, credible supply-side structural reforms, not all of which can be addressed by the budget, are needed to restore confidence in the economy. Will the finance minister do his bit? This is after all the last full budget before the 2014 elections and there will be pressure on him to play to the political gallery. The hope is that the government has in recent months taken several reformist steps, albeit only after it was pushed to the wall by the threat of a ratings downgrade. That threat persists and the reform momentum needs to be carried forward in the budget. If it isn’t, it won’t be long before the slowdown snowballs into a crisis.

 

 

TOUHID HUSSAIN

PGDM 2nd SEM

 

Govt taking steps to revive economy: Pranab

• 
  The Hindu President Pranab Mukherjee with Prime Minister Manmohan Singh and Parliamentary Affairs Minister Kamal Nath arrives to address both the Houses of Parliament in New Delhi on Thursday. Photo: Kamal Narang
• 
  PTI President Pranab Mukherjee’s address to the joint sitting of the Parliament, a constitutional requirement, marks the commencement of the Budget session of Parliament. File Photo

Expressing concern over declining growth, President Pranab Mukherjee on Thursday said the government is taking steps to revive investment activity and boost economy.

“Both global and domestic factors have affected our growth. We need to address the impact of both. My government has responded to the situation by taking several measures to revive investment activity and investor sentiment,” he said in his address to the joint sitting of Parliament at the beginning of the Budget Session.

The economic growth during the 2012-13 is expected to fall to a decade low level of 5 per cent. It was 6.2 per cent in the previous fiscal.

“The past year has been a very difficult one for the global economy ...It has been a difficult year for India also.

“The Indian economy is currently experiencing slower growth. The real GDP grew by 5.4 per cent in the first half of the current fiscal year. This is significantly lower than the average of around 8 per cent in the last decade,” Mr. Mukherjee said, adding the government is taking steps to deal with factors responsible for the slowdown.

On concerns over fiscal prudence, Mr. Mukherjee said, the government has announced a roadmap for fiscal consolidation and would contain the fiscal deficit to 5.3 per cent of the GDP in the current financial year.

Referring to the issue of price rise, he said “inflation is easing gradually, it is still a problem ... There has been a moderation in core inflation and recovery in growth is likely“.

The inflation based on Wholesale Price Index (WPI) plummeted to a three year low of 6.62 per cent in January. The retail inflation, however, continued to remain in double digit.

The government, he added, is also working with States to reach a consensus on Goods and Services Tax (GST), which will streamline indirect taxation system.

The address, a constitutional requirement, marks the commencement of the Budget session of Parliament.

Mr. Mukherjee also announced that the government proposes to introduce the Judicial Standards and Accountability Bill in this session as a “significant” measure towards judicial reforms.

Global recession

The President devoted a considerable part of the speech to the economic situation and the burden of gathering anxieties about slowdown, job security and employment prospects.

“People are concerned about the security of our women and children. They are also anxious about timely delivery of their entitlements and about persisting social and economic inequality,” he said.

Mr. Mukherjee said the past year has been “very difficult one” for the global economy. “Europe is in recession. Most emerging markets are growing very slowly. It has been a difficult year for India also. Both global and domestic factors have affected our growth.

“We need to address the impact of both. My Government has responded to the situation by taking several measures to revive investment activity and investor sentiment,” he said.

Indian economy

Mr. Mukherjee, who was Finance Minister before his election as President last July, noted that the Indian economy is currently experiencing slower growth.

“Real GDP grew by 5.4 per cent in the first half of the current fiscal year. This is significantly lower than the average of around 8% in the last decade. Our slower growth is the consequence of a combination of global and domestic factors,” he said.

The President assured the nation that the government was taking steps to deal with the factors responsible for the slowdown.

“Inflation is easing gradually but is still a problem. In recent months, there have been positive developments too.

There has been a moderation in core inflation and recovery in growth is likely. Policy measures announced during the year have also restored optimism at home and abroad,” he said.

“My government has announced a road map for fiscal consolidation by containing the current year’s fiscal deficit at 5.3 per cent of the GDP. The Government is also working with State Governments to reach a consensus on the Goods and Services Tax,” he said.

Crime against women

In his speech, he also referred to the enactment of a “path-breaking” the Protection of Children from Sexual Offences Act, providing for stringent punishment for persons who commit or abet such offences.

The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Bill has already been passed by Lok Sabha for ensuring a safe and secure environment for women in work places.

“My Government is also deeply concerned about incidents of sexual offences against women. After considering the recommendations of the Justice J.S. Verma Committee, the Government has promulgated an ordinance, amending the criminal law to provide for stringent punishment for heinous sexual offences against women.

“The Government has also begun to implement a series of administrative measures to improve the safety and security of women in the country,” the President said


ABDUL WAHEED
PGDM 2nd SEM.
IIMT COLLEGE OF MANAGENT

Profit on sale of investments bails out SBI

Despite advances growing at 15.5% from a year ago, the bank saw a decrease in net interest income 

  

          

eported a 4.1% increase in net profit to Rs.3,396 crore, below the Street consensus. But even that wouldn’t have been possible if it hadn’t made money from the sale of investments, taking advantage of lower bond prices and rising equity markets.

SBI’s operating profit grew a tepid 7.3% from a year ago as it made a profit of Rs.418 crore on sale of investments, compared with a loss of Rs.1,080 crore a year ago. Thus, it was able to show a Rs.1,575 crore increase in other income, which was about three times the rise in operating profit. This was in the face of a 3% decline in fee income.

Despite advances growing at 16% from a year ago, the bank saw a decrease in net interest income. For one, SBI had to transfer pension money worth Rs.20,000 crore into a trustee account and lost out on interest income.
The net interest margin slipped to 3.72% in the December quarter, compared with 3.77% in the September quarter and 4.13% a year ago. That was not wholly unexpected. SBI’s average cost of deposits increased 41 basis points from a year ago, while the yield on advances declined 18 basis points as it had cut lending rates in the previous quarter. A basis point is one-hundredth of a percentage point.
Asset quality problems also continued to bite. Overall, the bank added Rs.4,255 crore to bad loans in the December quarter, compared with Rs.2,016 crore in the preceding three months. As a result, gross non-performing assets (NPAs) as a ratio of total loans jumped to 5.3% at the end of December, compared with 5.15% three months earlier.
Fresh restructuring also continued, although SBI’s stock of restructured assets came down by Rs.12,259 crore. That was because there are new Reserve Bank of India (RBI) rules that allow upgrade of restructured assets and SBI has migrated Rs.15,097 crore into standard assets.
Secondly, total stressed assets (net NPAs plus restructured standard assets) still make up for 4.88% of gross advances. This number, too, has been increasing over the past four quarters. With RBI looking at new rules that may nearly double the provisioning on new restructured assets to 5%, all banks may push to recast more loans in the March quarter. Thus, the worst might not be over in terms of asset quality problems for SBI even if the bank management guidance was optimistic as usual.

TOUHID HUSSAIN
PGDM 2nd SEM

 

Moody's: Domestic thrust key to lowering c/a deficit

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Special Coverage

Budget 2013

The countdown has begun for the biggest economic event of the year and P. Chidambaram has a tough job on his hands.

A shopkeeper poses for a picture as he counts currency notes at his shop in Jammu May 16, 2012.

Credit: Reuters/Mukesh Gupta/Files

MUMBAI | Fri Feb 15, 2013 11:56am IST

(Reuters) - India will have to pursue domestic policy initiatives to help achieve any near-term improvement in its current account deficit as global growth may only be slightly better in 2013 and commodity prices are unlikely to ease sharply, Moody's Investor Service said.
While recent government moves to cut subsidies and woo foreign investment would help narrow the external deficit, these policies need to be persisted for any significant success, it said in a note dated February 14, issued just two weeks before India's annual budget on February 28.
India posted its second highest ever monthly trade deficit of $20 billion in January as imports surged to record highs, piling pressure on a widening current account deficit and limiting scope for the central bank to cut interest rates for an economy expanding at its slowest pace in a decade.
The current account deficit hit an all-time high of 5.4 percent of gross domestic product in July-September due to slowing exports and heavy oil and gold imports. The gap is expected to widen further in the subsequent quarter, data for which is due in March.
Moody's said it would be watching the assumptions underlying India's budget deficit target for the new fiscal year that begins on April 1, as well as the expenditure and revenue policies announced in order to meet that goal.
"Policies that trigger private investment and curb inflationary pressures in the near term are more likely to help narrow the account deficit," it said.
"Deficit targets based on an assumption of accelerating growth rates are more likely to be missed, leading to higher government borrowing requirements and likely inflationary pressure, both of which have negative implications."
The rating agency will also monitor whether the policy changes shift the composition of current account financing in favour of foreign direct investment, or whether external debt inflows accelerate faster than investment flows.
"If funding for the current account deficit shifted away from external debt and towards foreign direct investment, the sovereign credit profile would benefit," it said.
Moody's has a Baa3 rating for India with a stable outlook.
(Writing by Ranjit Gangadharan; Editing by Anand Basu)


md.Shanehaider
pgdm II sem

Subbarao warns of record current account deficit

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PTI : Mumbai, Mon Feb 11 2013, 14:35 hrs

Reserve Bank of India Governor Duvvuri Subbarao today cautioned the country was headed for the highest ever current account deficit this fiscal, after it rose to 5.3 per cent of GDP in the second quarter.
"Last year, CAD was 4.2 per cent of GDP, but this year we expect it would be significantly higher than that. It's going to be historically the highest CAD measured as a proportion of GDP," the Governor said, though he refrained from giving any figure.
He also expressed concern over the way the CAD, which is the gap between forex gained and forex spent, is being financed by volatile inflows instead of more foreign direct investments.
Subbarao was addressing the convocation ceremony of the RBI-set up Indira Gandhi Institute of Development Research (IGIDR) here.
The trade gap is widening mainly because of higher import of oil and gold. The third quarter numbers are expected later this week.
Flagging his concerns over CAD, which was the overriding theme of the third quarter monetary policy announced on January 29, Subbarao said these were regarding its level, quality and the way it is being financed.
"We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold.
"The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ideally be getting as much of FDI as possible to finance the CAD. On the other hand, what we are getting is a lot of volatile flows to finance it," Subbarao said.

MD.SHANE HAIDER
PGDM 2sem

Subbarao warns of record current account deficit

     Mumbai: Reserve Bank of India Governor Duvvuri Subbarao today cautioned the country was headed for the highest ever current account deficit this fiscal, after it rose to 5.3 per cent of GDP in the second quarter. "Last year, CAD was 4.2 per cent of GDP, but this year we expect it would be significantly higher than that. It's going to be historically the highest CAD measured as a proportion of GDP," the Governor said, though he refrained from giving any figure.
He also expressed concern over the way the CAD, which is the gap between forex gained and forex spent, is being financed by volatile inflows instead of more foreign direct investments.
Subbarao was addressing the convocation ceremony of the RBI-set up Indira Gandhi Institute of Development Research (IGIDR) here.
The trade gap is widening mainly because of higher import of oil and gold. The third quarter numbers are expected later this week.
Flagging his concerns over CAD, which was the overriding theme of the third quarter monetary policy announced on January 29, Subbarao said these were regarding its level, quality and the way it is being financed.
"We would not worry if the widening CAS is on account of import of capital goods, but here it is high on account of import of oil and gold.
"The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ideally be getting as much of FDI as possible to finance


TOUHID HUSSAIN
PGDM 2nd SEMESTER