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NPA crisis at Indian banks is mostly because of bad loan concentration in this one sector

India’s government seems intent on abandoning good ideas for dealing with the country’s banking crisis and encouraging bad ones. Perhaps that shouldn’t be surprising, given that the bureaucrats don’t yet seem to have grappled with the real nature of the problem.

The latest terrible proposal for dealing with the bad loans weighing down India’s state-owned banks, which control more than two-thirds of deposits, is to create a “bad bank” — an asset-management company that would take stressed assets off their balance sheets. Naturally, the scheme emerged from a committee made up of the heads of India’s nationalized banks.

Ownership of the new company would be shared between banks and private investors. It would have to raise at least 1 trillion rupees (about $14.5 billion) for an alternative investment fund from various pools of capital in the private sector. Why so much? Because the company will have to act as a market maker for stressed assets that nobody wants, picking up 15 percent of an agreed-upon floor price.

This is the real issue. There are already quite a few private-sector asset-management companies lurking around now that India has finally instituted a real insolvency code. The problem isn’t that they don’t have enough money, it’s that not enough of the stressed assets being put on sale look good enough to buy.

The most intractable bad loans, the ones the bad bank is meant to deal with, are concentrated in one sector: power. In particular, Indian thermal plants are struggling. A parliamentary subcommittee estimated earlier this year that 34,000 megawatts-worth of capacity is in trouble. Either nobody has signed up to buy power from these plants, rendering them unprofitable, or they don’t have access to subsidized coal.

An industry association thinks that the real number is closer to 50,000 megawatts, in the same ballpark as all the capacity added in the past five years of feverish plant-building. Others have provided even higher estimates. This is a significant proportion of India’s total power generation capacity — and, at perhaps 4 trillion rupees, a sizeable fraction of the banks’ balance sheets.India isn’t alone. In several countries, analysts are beginning to wonder if “stranded assets” — in particular, thermal capacity left behind in the shift to renewables or to more efficient generation — threaten to create systemic stress for the financial system. One estimate suggests that European financial institutions alone, including pension funds, have more than 1 trillion euros of exposure to fossil-fuel companies and projects, and even a smooth transition to a low-carbon economy might involve losses of 400 billion euros. Worse, it isn’t always certain who’s exposed to what degree — the exact circumstances in which sudden crises can take hold. In the U.S., meanwhile, coal companies are returning to the leveraged-loan market with a vengeance; fossil-fuel assets already made up a third of that market in 2015.

In India, renewable energy now looks competitive with “zombie” thermal power plants in terms of cost, while new plants require government subsidies and favorable administrative decisions that bureaucrats are reluctant to provide. In addition, provincial power utilities are chronically in the red because of their inability to force end-users of electricity to pay up. Even if they recover, and more and more Indians get access to electricity, a decent proportion of the investment in the sector is going to go into renewables or clean coal.

India’s GDP growth to rise to 7.5 per cent this fiscal, says Morgan Stanley report

India’s economic growth momentum is likely to pick up further in the April-June period and the country is expected to clock GDP growth of 7.5 per cent in this financial year, says a Morgan Stanley report. According to the global financial services major, the growth recovery will remain robust, supported initially by consumption and exports.

In the January-March quarter, India’s gross domestic product (GDP) grew at the fastest pace in seven quarters at 7.7 per cent on robust performance by manufacturing and service sectors as well as good farm output. “In aggregate, we expect GDP growth to pick up to 7.5 per cent in this financial year as against 6.7 per cent in 2017-18,” Morgan Stanley said in a research note.

According to Morgan Stanley, the macro-stability indicator of the economy like inflation and current account deficit are likely to be in check. The report forecasts Consumer Price Index (CPI) inflation to remain slightly above the inflation target of 4 per cent and the current account deficit below 2.5 per cent of GDP.

On inflation, the report said upside risks could emerge from a weak monsoon and also the implementation of the minimum support price hikes. High frequency indicators point towards a further pickup of growth in April-June period, though the strength has been reflected more in demand indicators as compared to the production side, the report said.

The report, however, noted that the risks to this growth outlook could stem from slower global growth or a rise in trade tensions impacting external demand. Moreover, a sustained, sharp rise in oil prices, a further rise in US rates and persistent US dollar strength, a delay in pickup of private investment and an adverse impact from a weak monsoon could impact the country’s growth momentum.

RBI monetary policy rate hike a ‘non-event’ for stocks; investors’ big focus turns to 2019 election

The morning after the day before and equity strategists remain split on whether the world-beating rally in Indian stocks will continue or pause for breath after Wednesday’s rate hike. All seem to agree that the big focus for investors now is next year’s election.

“Investors will forget the rate hike and refocus on individual companies and their outlook,” said Kishor Ostwal, managing director at CNI Research Ltd. in a telephone interview. “The fate of general elections next year will be the focus of attention.”

Indian stocks will surge to a new high as most investors are short and this quarters earnings are better than expected on aggregate, according to Ostwal.

India’s central bank raised interest rates to the highest in two years to tackle inflation pressures in the world’s fastest-growing major economy and shore up the rupee if a global currency war breaks out. Reserve Bank of India Governor Urjit Patel hinted at possibly more tightening to maintain economic stability amid growing risks from global trade and currency tensions.

The benchmark S&P BSE Sensex Index slipped 0.2 percent Wednesday after the hike. Still, the gauge has advanced 10 percent this year, holding its place as Asia Pacific’s best performing market and becoming the world’s best major stock market in local currency terms.

While Abhimanyu Sofat, vice president at India Infoline Ltd. also sees further gains, he expects a “churning” in terms of market leadership. A selection of banks and industrial stocks, such as Reliance Industries Ltd., is likely to lead to new highs, he said.

“Investors are likely to forget this hike soon as earnings growth is improving led not only by consumer but now industrials as well,” he said.

 

Good news for electricity consumers: India to have oversupply of power after missing targets for 2 years

India forecast for a third year that it will be able to supply more electricity than its distribution companies require as generation and transmission capacity rises. Supply from power plants will exceed demand from distributors by 4.6 percent, the Central Electricity Authority said in its Load Generation Balance Report for the year to March, released this week. Available generation capacity is expected to exceed consumption by 2.5 percent at peak periods, said the authority, an arm of the federal power ministry.

The CEA had also projected surpluses for the previous two years, though both ended up in deficit. The agency blamed last year’s shortfall on fuel and distribution constraints.

The outlook for this year factors in 9.6 gigawatts of new generation capacity from conventional sources, with about 85 percent of that coming from thermal plants, as well as an expansion in the transmission and distribution network.

The CEA’s demand forecast is based on estimates of what state distribution companies plan to buy from generators. That means it may not reflect latent demand from under-served customers or communities, according to Ashish Sethia, head of Asia-Pacific research at Bloomberg NEF in Singapore.

June GST collection near Rs 1 lakh crore mark but centre’s collection falls 20% short of target

Helped by the e-way bill and gradual improvement in compliance, the goods and services tax (GST) collections are rising, albeit gradually. However, these aren’t still keeping pace with the Centre’s budget targets.

The GST collection for June came in at Rs 96,483 crore, a trifle more than the same for May, taking the monthly average for the current fiscal (April-June) to over Rs 95,000 crore, compared with Rs 90,000 crore last fiscal (July-March).

The June collections consist of Rs 15,877 crore as central GST, Rs 22,293 crore as state GST and Rs 49,951 crore as integrated GST — including Rs 24,852 crore collected on imports. Additionally, collection from cess came in at Rs 8,362 crore, the government said in a statement.

Also, the compliance rate for June showed marginal improvement as 66 lakh eligible taxpayers filed the summary returns by the deadline compared with 64.7 lakh in the previous month.

Separately, the government said Rs 3,899 crore has been released to the states as GST compensation for the months of April and May.

Despite the gradual growth month over month, the revenue collection is well below the budgetary target.

While June’s CGST collection would amount to Rs 40,852 crore if half the IGST is added, the monthly budgetary target for the Centre is `50,325 crore. This represents a shortfall of nearly 19%. IGST is levied on goods moving across state borders and is eventually split equally between state and the Centre once the items reach the final consumer.

“The trend of a marginal increase in the GST tax collections continues during July and there would be some concerns on when a stable `1 lakh crore plus target would be achieved and the steps required to be taken to prevent fiscal slippages,” said MS Mani, partner, Deloitte India.

The GST mop-up could further be impacted by an estimated `1,000 crore next month owing to rate cuts on 88 items that came into force last Friday. However, the GST Council had said that lower rates would spur consumption and lead to further buoyancy.

Vishal Raheja, DGM, GST, Taxmann, said: “Certainly GST revenue collections are improving from last three months after implementation of e-way bill which is a major tool under GST to curb tax evasion. However the government is still short of the average monthly target of revenue fixed in Budget of 2018-19. The rate cuts on recommendation of the GST Council in the last meeting will impact collection in short run but demand will increase due to lower prices and it will boost collection in long run.”

Modi’s dream to double farmers’ income gets a leg up as agriculture exports pick up after 3 subdued years

Providing a major fillip to PM Narendra Modi’s dream of doubling farmers’ income by 2022, the farm exports have risen dramatically, reversing the trend of falling trade surpluses in the last three years. Agricultural trade surplus, i.e exports minus imports relating to farm commodities has improved in 2017-18 and also the first quarter of this fiscal, after deteriorating in the last three years. According to data released by the Commerce Ministry, India exported agricultural commodities worth $38.74 billion, as against imports of $24.89 billion, in fiscal year 2018.

Farm trade surplus in the year of $13.85 billion was higher than the $8.05 billion and $10.23 billion figures for 2016-17 and 2015-16, respectively. However, the figures were below the $ 17.93 billion in 2014-15, the first year of the Narendra Modi-led government, and the all-time-high of $ 27.72 billion in 2013-14, the last year of the Congress-led United Progressive Alliance (UPA) regime.

Notably, the period between 2003-04 and 2013-14, roughly corresponding with the UPA regime (both 1 and 2), saw a near six-fold jump in India’s farm exports, from $ 7.53 billion to $43.25 billion. According to source, the primary driver was the global commodity boom, with the United Nations’ Food and Agricultural Organization’s Food Price Index (base year 2002-04=100) soaring from an average of 97.7 in 2003 to 229.9 in 2011.

High international prices for various commodities provided a fillip to shipments of to various products including spices, coffee, tea, cashew, tobacco, oil-meals and rice, which constituted India’s traditional agri-commodity export basket. An interesting trend in India’s exports is the rise in the spectacular rise in exports of commodities that weren’t as significant at the start of the century. There are four notable items in the list- buffalo meat, guar-gum, raw cotton and corn.

India has risen from nowhere to become the world’s largest bovine meat exporter — rising from a mere $ 341.43 million in 2003-04 to $ 4.35 billion in 2013-14 and peaking at $4.78 billion in the first year of the Modi government — had partly to do with spiraling global prices, more so during 2009-14, source said.

In case of guar-gum, exports zoomed from from just $ 110.53 million in 2003-04 to $ 3.92 billion in 2012-13. The main driver for such an unprecedented rise is attributable to oil, more specifically the US shale boom. The said gum — extracted from the seeds of guar, a hardy legume crop grown mostly in Rajasthan — is used as a thickening agent in the fracking fluid (primarily water and suspended sands) that gets injected at high pressure into shale rocks to create cracks and allow the oil/gas to flow through them, noted the newspaper.

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