Economy & Finance: The week that was

Economy & Finance: The week that was

Equity markets have been through carnage this week with gloom engulfing the markets all around and there seems to be no light at the end of the tunnel. For the first time, after NDA  government assumed power at the centre in 2014, the opposition Congress has vociferously accused the Modi government of steering the economy into a deep crisis. In a statement issued by the party , it said that the Modi government is the best example of how not to manage  a nation’s economy. The party also expressed concern at the methods employed for arriving at the GDP data, as questions have been raised by economists regarding the revised questionable methods adopted for the purpose. The party accused the Prime Minister Modi of systematically undermining all the good work done by the earlier UPA Government and attributed the so called improved economic atmosphere in the first months of this government to the profiteering resorted to by the government from historic low crude prices. However, the government has put up a bold face , as Finance minister  Arun Jaitley has stated that there is no need to panic as he believes that the inherent strength of Indian economy is very much intact and the happenings in stock markets are a result of global developments. As seen during the week, continuing from its last week losses, both the benchmark indices lost heavily and there was an overall unbelievable loss of 1630 points for BSE and  491 points for Nifty as the same fell from 24616 to 22986 and from 7489 to 6980 respectively and this was the worst week for these indices since October 2008, when the economic order world over had virtually collapsed.
Whatever be the political discourse adopted by the ruling and opposition parties regarding the troubled financial markets , it is a hard fact that  the entire global economy  is undergoing  a severe turmoil and the issues like problems in China , negative interest rate regime in some countries , falling crude oil prices have compounded this turmoil, but at the same time it is also a fact that  there have been certain domestic factors which have been the cause of this pandemonium in our stock markets . Despite the fact that we have all along been claiming that India’s economy is one of the few growing economies in the world, entire oil bonanza as a result of falling oil prices has been retained by the government instead of sharing the same with consumers and now experts believe that at least half of it should have been passed on to consumers so that their confidence could be built for spending more. Moreover it is also a fact that quarterly earnings of the companies continuously over the last three quarters have been dismal with poor performance in manufacturing as well as service sectors and the banking system in the country which actually forms the back bone of every economy is crumbling under the heavy ever increasing pile of non-performing assets.
This week quarterly results of major public sector banks have been a cause of very serious concern and these banks seem to be on the verge of losing their highly safe category tag, as the numbers reflecting the magnitude of the impaired assets could snowball into a real crisis for some of  such banks and their very existence may be at stake. More provisions for such assets would automatically lead to significant erosion in existing capital, thus leading to more and more requirement of fresh capital in order to fulfill capital adequacy requirement even for their existing business. In terms of existing guidelines laid down by RBI, the banks whose gross non-performing assets exceed 10% of their loans portfolio cannot  lend , open new branches or recruit staff  without the permission of RBI and the latest  numbers indicate that there are certain banks which are  in real danger of coming under regulator’s  this restriction . Even in a big bank like Punjab National Bank, GNPAs as at the end of December have touched 8.4% and in case of a relatively weaker bank Dena Bank this percentage is already at 9.8%.  The biggest bank of the country, SBI also came out with very week numbers and reported 62% fall in its net profit figures. What is more concerning is that the gross NPAs of the bank have also grown by 28%  on a yearly basis in December and the GNPA ratio of the bank is 5.10% now. It is therefore quiet clear that commercial banks are going through very tough times and with RBI’s direction of cleaning up their balance sheets by March 2017, certain banks may actually be heading towards a negative net worth calling therefore for huge recapitalization. The existing and future stress on banks’ books is expected to result in a deteriorating earnings profile and it has left the price to book value (PBV) of all public sector banks at near two-year lows of less than one. Even in case of SBI this value is at 0.72% and in case of other leading public sector banks, it is lesser than that. In case of five banks it has got reduced to less than 0.25%. What is surprising is that Private banks like Kotak bank and HDFC bank have a price to book ratio of 4.8 and 4.2 respectively. In fact all the leading private banks are trading at more than 1.5 times of their book value. It is generally believed that severe economic crisis are always triggered by bank failures. As seen above, our banks may actually be ready to fire such a trigger and the country may  be on course towards a deep economic crisis. The issue was raised with Arun Jaitley, the FM at the end of the week who stated that the stressed asset problems of public sector banks were being blown out of proportion. He further stated that government was considering more  steps to empower banks for effecting recovery in bad loans  and Bankruptcy law which is  in active consideration would boost the ability of banks to recover monies consequent to accelerated disposal of stressed assets. RBI  Governor   Rajan also shared the optimism of Finance Minister and assured that only a small minority of public sector banks could fail capital adequacy requirements in the absence of any recapitalization.
Jammu and Kashmir Bank also came out with its December  quarter numbers during the week . Its net profit for nine months ending December has shown a decline when compared with last year. However, the net profit of the quarter has increased to 117.68 crores as compared to 104.64 posted in the same quarter last year . The area of real concern for the bank , like public sector banks  are its non-performing assets , which in gross terms have increased from 3081 crores to 3339 crores showing an increase of 9%. The gross NPA ratio of the bank has thus increased to 6.81% . What is however satisfying is that the bank increased its provision coverage ratio from 62% to 68% , which in other words means that the bank has already provided for 68% of its gross non-performing assets . In terms of market capitalization  the bank  has suffered heavily and unlike private sector peers like Indus Ind Bank and Yes bank, its price to book value is reduced to 0.53 , more in league with the public sector banks  and as against a book value of Rs.126/- , share is presently trading around Rs.68/-
The week again saw the demand of yellow metal shooting up considerably as gold prices moved from 1160 to1246 dollars per ounce and the metal was now trading at a one year high . Experts believe that risk aversion has sent investors to the safe heaven asset amid the tumble in global stock markets and concerns over the global economy.
Despite a very difficult week ,there has been a silver lining in government having mopped up Rs 10.66 lakh crore till January 30 by way of tax collections. This includes Rs 5.22 lakh crore from direct taxes and another Rs 5.44 lakh crore through indirect taxes and these tax collections are 73.5% of the annual Budget target. Government is confident of achieving this target. So far the growth when compared with the previous year is 10.9%  and 33% for direct tax collections and indirect taxes respectively and it does indicate that there are new investments in the country.
During the week there was another important development. Issue of Net neutrality which had been hanging fire for quiet a long time now was resolved as the Government decided  that  that Internet cannot be allowed to be monopoly of few and Telecom Minister Ravi Shankar Prasad  slammed Facebook’s Free Basics programme and said such differential pricing modes are plainly not acceptable. The regulator TRAI issued an order supporting net neutrality and effectively banning all zero rating platforms in the country. As a result of this order, all data will be treated equally and all the Internet Service Providers would necessarily be required to treat all the content passing through the internet equal with no discrimination whatsoever, on any account
The minister said the Trai’s order on differential pricing for data services has enhanced India’s image in the Net community world over and established its maturity. Indian regulator has now become the first telecom regulator globally to ban zero rating plans like Facebook’s Free Basics and Airtel Zero.
In terms of data compiled by a leading economic daily Pakistan’s Shan Foods Pvt. Ltd has, over the past few years, become popular in north India, sweeping aside Indian masala brands. According to market estimates, 50-60% of all masalas used in non-vegetarian cooking in north India are made by Shan. The company is now appointing more distributors and also selling online through Amazon.in  as it seeks to expand its presence to other parts of the country, including the South.
On the macroeconomic front, the Gross Domestic Product expanded at 7.3% in the third quarter ending December as compared with growth of 7.7% recorded in September quarter. Retail inflation has touched a high of 5.69% in January as Food inflation has risen to 6.85% from 6.40% in December. Industrial production index for December contracted 1.3% on yearly basis. Manufacturing output has declined 2.4% in December and 10 out of 22 industry groups in the sector have shown a negative growth. Output of capital goods has also contracted 19.7% in December after having shrunk 24.4% earlier in November.
On the International front Chinese forex reserves have plunged to more than three year low and The White House expects only modest growth for the US economy over the next two years, restrained by global economic weakness, according to its annual budget proposal released  during the week. The proposal also foresees steadily increasing budget deficits, after several years of reduction, unless Congress passes a package of reforms that will increase taxes on the country’s wealthiest. President Obama has already proposed a duty on each barrel of crude imported or exported.
In the week ahead, Chinese markets will be opening after  a week long holiday and in tandem with our weak macro economic data released at the week end may act as a catalysts  in  dictating the market movements . Moreover the focus during the week will be on the upcoming budget proposals, as the market is eagerly awaiting some path breaking initiatives. A mega “Make in India” compaign opens in Mumbai at the start of the week. Heads of State from Sweden, Finland, Lithuania and Poland along with 25 ministers of trade and industry from several countries including Germany and Japan are attending. PM will interact with world leaders and make a pitch for his dear to heart campaign.

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