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BIG NEWS – Sep 22nd 2017

Posted on 22-Sep-2017 Comments  0

October Policy

RBI is likely to maintain status quo on rates…

With the month of September almost coming to a close, the question shifts to the stance of the RBI in the forthcoming credit policy in October.Remember, the RBI may have cut rates by nearly 200 bps since January 2015 but the CPI inflation during this period has gone down by more than 600 bps. This high level of real interest rates is one of the prime reasons why bank lending is not picking up. A rate cut would solve this problem. However, the RBI may choose to hold rates in October and prefer to err on the side of caution. Here is why!

CPI inflation is up sharply…

If there is one development in the last 2 months it is the sharp rise in inflation. The CPI inflation is up by 190 basis points from 1.46% in June 2017 to 2.36% in August 2017. Out of this 190 basis points rise, nearly 152 bps has been contributed by food prices alone. The RBI may tend to believe that higher MSP on most food crops may result in a sharp rise in inflation as we saw between 2009 and 2011. The second worry is on the core inflation where oil prices play a key part. Brent Crude has already settled above the $55/bbl. mark and oil is now promising to get closer to the $60 mark. That will imply a sharp rise in core inflation and that could be a further boost to CPI inflation. The RBI may not be too keen to risk setting lower rates,especially at a time when inflation is showing upside risks; both on the food and core inflation front!

Jaitley’s fiscal stimulus…

The finance minister has, for the first time, acknowledged that lower GDP growth could necessitate a fiscal push. In fact, the government is already pushing for a $7.7 billion stimulus to the Indian economy.For the current fiscal, the government is likely to overshoot its fiscal target by the permitted 50 bps and end the year at a fiscal deficit of 3.7% of GDP instead of 3.2%. That will put pressure on the rupee and also lead to rating downgrades resulting in FPIs pulling out money. Under this scenario, the government would not be too keen to aggravate the situation by cutting rates. Rather the government may wait for GDP growth to pick up in the next quarter before considering rate cuts!

Fed is getting hawkish!

Inits September FOMC meet, the Fed has already given two hawkish indications. The higher inflation guidance is seen as a likely trigger for another rate hike in December this year. The Fed has also spoken about a possible taper of $10 billion per month starting October 2017. While this is too small to make a significant dent, the sentiment on global liquidity and US rates is likely to shift against emerging markets. Probably, October may be too early for the RBI to consider a rate cut without seeing the impact of the taper. The financial markets may have to be prepared for status quo in October!©

Fiscal Deficit Target

Should the government give up on its fiscal discipline?

The first quarter GDP at 5.7% and the GVA at 5.6% came in as a shock to the markets and to policy makers. In fact, the government has shown alacrity and hinted at a special fiscal package of $7.7 billion to boost growth in the Indian economy. The move, it is feared, will lead to the fiscal deficit overshooting its original target for the year by 50 bps. So, we may end up with a full year fiscal deficit of 3.7%instead of 3.2%. The question is whether such a higher fiscal stimulus at the cost of fiscal discipline is justified at this juncture. The answer is a clear “No”. Here is why!

We are already stimulating…

To be fair, the government is already giving the economy sufficient stimulus. If one breaks up the IIP number and the GDP numbers, the only sectors that are outperforming are either the sectors that depend on government spending or on government policy. Thus, steel and natural gas sectors are outperforming. Similarly, under the services category we get to see the best growth in public services,social investments and defense services, all of which are stimulated by the government. In fact, the biggest stimulus to the infrastructure sector in India is also coming from government’s massive spending on roads. Most of the government spending already has strong externalities. The problem is that private investment is not picking up and that looks unlikely to change. More stimulus,therefore, may not help!

The problem lies elsewhere…

The real investment shortfall is from the private sector. That is because they have neither the resources nor the intent to invest. Like the government has supported steel and chemicals, a more favorable policy towards power and telecom can go a long way. These sectors are under tremendous stress and the recent policy on MPPs and IUC has only worsened matters for these sectors. There is also the need for along-term solution to the NPA problem. There have been smalls steps,but no quantum shift has happened. Focused and granular action will go much farther than a macro fiscal stimulus.

The cost of fiscal indiscipline…

The most important thing to remember is that fiscal stimulus has a cost.The global investors and rating agencies appreciated India’s focus on fiscal discipline in the last 2 budgets. Counter-cyclical fiscal policies have been tried in many countries with little effect. Even in India, we have seen the negative effects on inflation in the years between 2009 and 2012. Then there is the threat of external rating agencies downgrading the ratings if there were a sudden spike in the fiscal deficit or in the revenue deficit. We have seen the negative impact of such a move in 2013. The government has shown exemplary fiscal discipline in the worst of times. The challenge is to stick to it! ©

Tata Sons

The consolidation of power has just about begun…

Back in 1992 when the original satraps like Rusi Mody, Darbari Seth and Nani Palkhivala posed the first major challenge to the Tatas, Ratan Tata learned an important lesson. It was necessary to consolidate his ownership over Tata Sons. What Ratan Tata must have learned from the Ministry saga is that his control over the Tata group must be absolute and unquestionable. The all-important meeting of the Tata Sons board on 21st September needs to be looked at in that light!

Taking Tata Sons private…

The proposal to convert Tata Sons into a private limited company was easily passed through by a comfortable majority, despite objections from the Misty camp. This will have two major implications. The Tata family will now be able to exercise much greater control over the operations of Tata Sons and therefore the Tata Group as a whole.Secondly, the Mistry group will be largely marginalized as they willnot able to even sell their shares without the explicit consent ofthe Tatas. That will virtually obviate the risk of a group of businessmen led by Mistry trying to take control of Tata Sons through the back door. Of course, the eventual decision will rest on the National Company Law Tribunal (NCLT), but it is doubtful to what extent NCLT could really make a difference to the final decision that has been taken in the board meeting with a decisive and comfortable majority.

The preference share issue…

The board meeting also passed a significant resolution that preference shareholders will have a right to vote if dividends were skipped fora period of 2 years. Why is this so important? It needs to be remembered, that Ratan Tata is the largest holder of preference shares in Tata Sons. There was a dispute over whether Mistry family’s share in Tata Sons was to be calculated with or without considering the dilution due to preference shares. In fact, if the dilution due to issue of preference shares is considered then the share of the Mistry family in Tata Sons comes down sharply from 18.4% to 2.86%.Ratan Tata, individually, becomes the most significant shareholder in Tata Sons giving him total control over the group in the process.

What next for Mistry?

The decisions at the board meeting virtually closes the doors for the aspirations of Cyrus Mistry. With the conversion to a private limited company and the status of preference shares clarified, Mistry has two options in front of him. Firstly, he can continue to be a passive shareholder in Tata Sons with restrictions on future transfer of shares to outside parties. Secondly, Mistry has the option to enter into a deal with the Tatas to exit his stake. The next few months after the NCLT decision could be interesting to watch! ©

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