Budget 2016: Govt should deviate from RBI’s stance and spend liberally for agriculture and infra sectors - Firstpost

Budget 2016: Govt should deviate from RBI’s stance and spend liberally for agriculture and infra sectors

By G. Chokkalingam

The macroeconomic indicators of the world including India are quite scary. The largest economy in the world, the US, posted just 0.7% GDP growth, European Union (consisting of 29 countries) posted a mere 0.3% growth and Japan’s GDP shrunk by 1.4% in the December 2015 quarter. China, the second largest economy in the world posted GDP growth of 6.9% in 2015 which is the lowest in more than 2 decades. While Russia contracted its GDP by 3.7%, Brazil is estimated to have seen a fall of 4% in its GDP in 2015. These economies together account for nearly 3/4th of global GDP!

GDP_380Several major economies have higher inflation targets and some have negative interest rates. Resources including oil and coal, metals, have hit 6 to 13 year lows. Shipping freight index hit multi-decade low. Even the agri-crop prices have hit 6-year lows – a rare phenomenon of falling prices across the board in the recent history. Rising deflationary pressures have taken a toll on the global equities – about 40 stocks markets in the world have fallen 20% from their respective peaks.

Indian agrarian economy, corporate world, government-owned (PSU) banks and equity markets are under severe crisis. Two consecutive monsoon failures have hit the farmers very badly and also the rural demand. Over 6 quarters have seen almost stagnating profits for the corporate. Even the defensive businesses like FMCG, pharmaceuticals and technology industries are going through the pain of deflationary pressures. Top 5 pharmaceutical companies have seen average 6% year-on-year (yoy) revenue growth in the December 2015 quarter, partially also due to stringent US FDA regulatory norms. Top software companies have posted poor single digit growth in their dollar revenues. Many FMCG companies have posted poor single digit volume growth. Their performance is much worse than what it was during the post-Lehman crisis period.

Due to stringent asset quality recognition norms of the RBI, the PSU banks have lost about Rs 113,000 crore (30%) of market cap in the last 5 months. Twelve PSU banks (including the one which posted loss before tax) - have posted losses in the December 2015 quarter. As the correlation coefficient between the banking index and broader index like Sensex is 0.98, the crash in the banking stocks along with deflationary pressures have led to 21% fall in the Sensex from its historic peak level.
The BSE has lost over Rs 16 lakh crore of market cap since March 2015 and in the same period, the rupee exchange rate against the US dollar has fallen 10%. The Sensex has a correlation of 0.72 with rupee exchange rate as there exists strong relationship among the sentiments in the stock markets, FII flows and the exchange rates.

Before the declaration of December quarter results, many PSU banks posted 2 to 6 percent yoy growth in their deposits. Some have posted even degrowth in their deposits, a quite rare trend in the history of Indian banking industry in the last 2 decades. Some of them are going through downgrades by the rating agencies. It is most likely that the public depositors will also downgrade their confidence in the loss-making PSU banks going forward. Both the borrowers (especially in the infra and steel sectors) and many lenders (the PSU banks) are in extraordinary stress. The RBI’s stringent measures have shrunk the balance sheets of the PSU banks and the consequences are already evident.

Regulators and the government do not have the role of propping up the stock markets. But certainly they need to work for the stability of the stock markets. Nearly Rs 100 lakh crore is added to the total BSE market cap in the last 13 years – from Rs 5.7 lakh crore in FY2003 to over Rs 105 lakh crore last year.
In the same period, the GDP moved up only by about 5-fold! The stock markets have grown too big and the same is case with the FIIs who control 1/3rd of total floating stocks and whose holding value of Indian equities is about 85% of India’s forex reserves! Hence, there is a need for a dichotomy between the RBI and government in terms of policies - it is high time the government assumes the onus of the RBI in helping the PSU banks.

Infuse huge capital into the PSU banks, ignore focus on fiscal consolidation, rather spend liberally for the agricultural and infra sectors, and also for investments into the PSU banks. Otherwise, in this stressful economic environment of rising global deflationary pressures and fallings stock markets, any aggressive effort to strengthen the balance sheet of the government and also imposing the long-term capital gains tax on equities at this juncture would have disastrous consequences for the stock markets and the domestic economy.

The writer is Founder and Managing Director at Equinomics Research & Advisory. His views are personal.

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