INDIAN ECONOMY: OVERVIEW, GROWTH & DEVELOPMENT
Populist doles could lead to fiscal slippages
Continuing to voice concerns over populist measures, the Reserve Bank Wednesday warned that income support schemes and farm loan waivers will lead to fiscal slippages for the states.
The remarks were made during a meeting between the members of the 15th Finance Commission and the RBI brass, including governor Shaktikanta Das and the deputy governors, at the central bank headquarters.
In its presentation, the RBI listed out specific factors that would drive fiscal slippages in the revised estimates of 2018-19, including “farm loan waivers and income support schemes”, an official release said.
The presentation mentioned that in the past, states’ fiscal position was stretched due to the UDAY bonds for the power sector.
It can be noted that ahead of the general elections, a slew of states and also the Centre had doled out sops to the marginalised sections, including the farmers and the poor.
While the BJP-led states have announced sops in the face of rural distress and agitations, three Congress-led ones made it a point to declare such schemes soon after taking over the office last December.
The Centre has drawn inspiration from the income support scheme of Andhra Pradesh and extended it to the poor households nationally, while the Congress is promising an assured income of Rs 72,000 per household through income support if it is voted to power, which is being dubbed as a scheme which would drain resources.
Manager now warns of realty stress
The next flash point in India’s credit markets could be real-estate debt.
That’s the view of ICICI Prudential Life Insurance Co., a major corporate bond buyer and one of India’s top life insurers. The firm avoided investing in debt of stressed companies before credit market strains spread last year.
That crisis was triggered by shock defaults by major infrastructure financier IL&FS Group, and its fallout pushed up financing costs for a range of borrowers including wealthy property tycoons struggling to roll over debt. The country hardly needs more stresses now just as credit markets regain some normalcy after policy makers took steps to inject more liquidity into the financial system.
“While most of the credit market is healthy, one needs to be cautious on NBFCs having large exposure to the real-estate sector,” said Chief Investment Officer Manish Kumar, who oversees 1.1 trillion rupees ($15.8 billion) at ICICI Prudential Life. Pressure may rise at non-bank firms, raising the need for lenders to liquidate assets or for stronger developers to buy up projects, he said.
Indian shadow banks lent heavily to the property industry in recent years, helping to fuel a construction boom. They now face rising risks that weaker developers may struggle to repay those borrowings, as housing sales have failed to keep pace with debt expansion. Teetering economic activity also isn’t helping.
Earlier this year, troubles for mortgage lender Dewan Housing Finance Corp. were among factors that pushed up financing costs.
An analysis of about 11,000 home builders by research firm Liases Foras in February showed that developers on average have to repay twice as much in debt each year as the income they generate that can be used to service it. Property prices in India’s biggest cities have been flagging — home values in Mumbai sank 11 percent last year.
That all means property debt investors need to be extra cautious, but there are still pockets of opportunity, according to ICICI Prudential. The firm has raised corporate bond holdings to 33 percent from 31 percent since the IL&FS crisis, mainly by increasing investments in notes issued by top-rated housing finance firms and bonds that will be serviced by the government.
FICCI seeks govt’s intervention
Industry body Ficci has sought the government’s intervention for early resumption of mining in Goa, claiming that the Rs 3,400-crore sector that contributes around 10-12 percent to the state GDP was under severe threat due to the apex court quashing mining leases. “The sudden discontinuance of mining operations in Goa is creating a huge loss to the mineral sector as a whole…Therefore, government’s intervention is requested for early resumption of mining operations as the situation at ground is a grave concern for the whole sector,” Ficci said in its recent representation on the mining industry to government think-tank NITI Aayog.
A sizeable population of Goa, it said, is directly or indirectly dependent on mining activities, adding that the mining industry in the coastal state has a size of around Rs 3,400 crore.
“Goa Mining Industry…is under severe threat due to the recent Supreme Court decision. This can severely impact the employment of around 1.5 lakh to 2 lakh people, who are directly or indirectly dependent on the sector for livelihood,” it said.
Needless to say, this can also potentially lead to severe loss of investor confidence in the country by increasing the non-performing Assets pertaining to the Mining sector.
The Supreme Court judgement dated February 7, 2018, quashed the second renewal of iron ore mining leases given to 88 companies in Goa in 2015, it said. According to the apex court’s previous judgements, only fresh leases were to be granted by the Goa government, not second renewals, it said.
“This decision has led to stoppage of mining operations in the state of Goa with effect from March 16, 2018. Unfortunately, this judgement by the Supreme Court does not seem to be in line with the amended MMDR Act, 2015,” it added.
“As per amended MMDR Act 2015, all mining leases granted before the commencement of the Amended Act, 2015 shall be deemed to have been granted for a period of fifty years,” Ficci said.
Anil Ambani needs $2 billion in asset sales
The last stronghold in embattled tycoon Anil Ambani’s phone carrier-to-power empire is also developing fault lines.
Reliance Capital Ltd., his financial services business that almost doubled its profit in five years, had largely remained insulated from the distress plaguing the wider conglomerate. Now, the company that controls India’s fifth-biggest mutual fund, is racing to close a planned $2 billion of asset sales to bolster its finances after cash dwindled to 110 million rupees ($1.6 million) as of March, according to CARE Ratings.
With $252 million of debt falling due over May and June, a unit of Moody’s Investors Service and two other local firms have slashed ratings of Reliance Capital or its short-term instruments, citing holdups in asset sales, deteriorating liquidity and risks on loans to unprofitable affiliates. The downgrades came against the backdrop of soaring finance costs for an industry shaken by last year’s meltdown at one of the nation’s biggest shadow lenders that’s unrelated to Reliance Capital.
Asset disposals are key to averting a crisis at Reliance Capital, said Mathew Antony, a managing partner at Mumbai-based Aditya Consulting, a credit advisory firm. “Unless some strategic infusion of long-term equity comes into the company, the day when Reliance Capital falls into a liquidity crisis isn’t too far,” he said.
A Reliance Capital spokesman declined to comment on the steps being taken to improve liquidity.
The company told exchanges on April 27 that it has short-term debt of 9.5 billion rupees, which will get fully repaid by end-September using proceeds from the sale of its stake in the asset management business. The 43 percent stake was valued at 53 billion rupees, it said.
Of the 140 billion rupees of planned divestment, almost all the transactions are behind schedule, CARE Ratings said in an April 18 statement while slashing Reliance Capital’s long-term rating to A from A+ and putting it on a “credit watch.’’
RBI’s revised guidelines for resolution of stressed assets likely before may 23: report
The Model Code of Conduct for the Lok Sabha polls is unlikely to have any bearing on issuance of a revised framework for resolution of stressed assets by the Reserve Bank and the guidelines are expected to be announced before May 23, sources said.
Against the backdrop of the Supreme Court quashing an RBI circular, issued on February 12, 2018, a revised set of rules is under works and would be released soon, they said.
Earlier this month, the Supreme Court had quashed the RBI’s February 12 circular on stressed loan recognition and resolution of large borrowers over Rs 2,000 crore, terming it as “ultra vires”.
“The model code of conduct exempts RBI’s monetary policy. It is unlikely to attract any action if the RBI issues the revised (February 12) circular,” sources said.
They said the central bank is in very advanced stage and the revised circular should be out before declaration of general elections result.
The counting for the ongoing Lok Sabha elections will take place on May 23.
The RBI is looking into all the concerns raised by various stakeholders including banks and power sector companies and may look to tweak the circular without diluting it completely so that the momentum towards resolution of stressed assets is not affected, sources said.