Belying FM’s confidence, fiscal deficit will not reduce

The measures announced by the government will be insufficient to contain the fiscal deficit at 5.3% of GDP in FY13 due to higher subsidies and lower tax revenues, says Nomura Economics Research

The fiscal and current account deficit of India have been getting out of hand. As a proportion of budget estimate, fiscal deficit during April–July 2012 was 51.5% and revenue deficit was 61.3%. The fiscal deficit in rupee terms as per the budget estimate was Rs5,13,590 crore. For the period April-July 2012, the fiscal deficit was Rs 2,64,432 crore. The finance ministry expects the current account deficit to narrow to 3.7% of GDP ($70.3 billion) in FY13 from 4.2% of GDP ($78 billion) in FY12.
To address these problems, finance minister P Chidambaram today announced a new fiscal consolidation road-map. According to his hopes:
Fiscal deficit is to be reduced to 5.3% of the GDP in FY13 (Budget: 5.1%) from 5.8% in FY12, to 4.8% in FY14 and by 0.6 percentage points every year to 3% by FY17 (year ending March 2017).
Disinvestment to be a big push with a number of companies identified to attain this year’s targeted revenue of Rs300 billion.
The finance minister is confident of meeting the budgeted tax revenue, disinvestment, and telecom spectrum targets for FY13.
To contain plan and non-plan expenditure.
Despite fiscal consolidation plans, all flagship schemes are to remain untouched, to protect the poor.
The government is committed to introducing the goods and services tax (GST) and will review the Direct Tax Code.
Increased reliance on direct cash transfers to cut leakages on subsidies.
Will this work? The market’s verdict is negative. Even as the FM was finishing his speech, the market, which was firm since morning started to go down and slipped into the red. 
Nomura Economics Research, in its First Insights Report, has said that the roadmap is a step in the right direction, but it lacks detail.
The measures announced will be insufficient to contain the fiscal deficit at 5.3% of GDP in FY13 due to higher subsidies and lower tax revenues, says the investment bank. Moreover, as with other reform measures announced so far, implementation remains the key.
Nomura suspects that the timing of the announcements (one day ahead of the RBI policy meeting) suggests growing political pressure on the RBI to cut rates tomorrow. In the absence of any credible plan to lower the fiscal deficit, Nomura anticipates no repo rate cut tomorrow, with only a 25 basis point cash reserve ratio (CRR) cut. 


Kotak fears “investment cliff”—predicts investment slowdown in next 18-24 months

Kotak Institutional Equities fears investments in ‘traditional’ sectors, such as power, roads and telecom, to dry up quickly as the government and banks struggle to obtain finance required to lend to businesses

In their new strategy note to clients, Kotak Institutional Equities (Kotak) expects investments in ‘traditional’ sectors, such as power, roads and telecom, to dry up quickly as the government and banks struggle to obtain finance required to lend to businesses. The note said, “We see a potential decline in investment after the next 18-24 months unless the Indian government can conceptualise and award new investment projects quickly.” It is nothing new that the Indian government has bungled up on the infrastructure front and sent the current account deficit soaring. In fact, finance minister P Chidambaram is ‘confident’ of raising as much as Rs30,000 from divestment proceeds. Whether this will go to fixing long-term infrastructure bottlenecks or meet short-term obligations such as current account deficit is not known. 
The Indian government has run out of funding options, to finance infrastructure and bridge the burgeoning current account deficit and is currently staring into fiscal abyss. In an effort to ‘conceptualize’ and kick-start the economy (and raise much-needed funds), in the last few months, it has announced a slew of so called ‘reform’ measures—ranging from divestment in public sector units (PSUs) and key economic reforms in retail and aviation. The note said, “We believe the government can formulate a divestment policy, through which the divestment proceeds are used exclusively fund infrastructure projects. Currently, the government is monetizing long-term cash flows of government-owned companies upfront to meet short-term deficit targets.” While this is true, there’s a more pressing concerned which has gone unnoticed by everyone—investor protection.
Divestment will not work unless adequate safeguards are provided to protect small investors, especially on the pricing front. We had written earlier ( on how the government has mismanaged its divestment process because it does not look after the interest of the small investor, an issue repeatedly raised by Moneylife. Even today, investors struggle with demat shares, years after demat was introduced as a reform measure to boost participation (
Furthermore, the chart below provided by Kotak, shows capital expenditure (capex) has plummeted in the last one year. This is due to lack of confidence in the government to follow up on infrastructure projects (i.e. policy inaction), inability of the Reserve Bank of India (RBI) to contain inflation and high interest rates which makes borrowing unviable. The RBI will meet tomorrow, on 30 October 2012, to decide whether to change interest rates or not. So far, the RBI has not done a very good job of reigning in inflation and balancing long-term growth. 
In order to prevent the “investment cliff” (i.e. sharp fall in infrastructural investment) from happening, Kotak has suggested the Indian government come up with alternate modes of funding, including divestment (which has worked against the small investor). It has suggested expanding and deepening the Indian bond market, especially long-term bonds. So far, only a few PSUs have issued long-term bonds, from infrastructure companies such as NHAI, NHPC, NTPC and PGCIL, while there is hardly any secondary market for it. However, we feel that unless small investors’ interests are looked after, these are unlikely to work. After all, the quantum of retail investors has declined drastically over the years ( If few investors are investing in equities (which beat inflation), who will invest in long-term bonds let alone have faith in them? We need competent regulators first before the Government even ponders fancy measures. (
The other measure Kotak suggests is to involve pension funds and the insurance sector to invest in the infrastructure sector. The Insurance Regulatory and Development Authority (IRDA) had allowed general insurance companies to invest a minimum of 10% of their corpus in infrastructure bonds. Kotak believes that with the corpus that life insurance has, there could be significant impetus from them in the infrastructure sector. However, there’s one caveat to this—insurance and pension funds can only invest in ‘AAA’ rated companies. Thus, this would largely depend on the role of credit-rating agencies, which have been cast in poor light for their role in the sub-prime crisis and their waning influence on the markets ( and (
Other solutions provided by Kotak include bridging India’s much under-utilised water-ways, reduced reliance on fossil fuels and upgrading urban facilities such as housing, mass rapid transit systems, nuclear power etc,. This is what Kotak calls ‘new’ sectors as opposed to ‘traditional’ sectors. It said, “New projects in these segments can address the challenges, improve productivity and sustain the investment cycle.” Sectors like gas pipelines, power, E&P, refining, telecom to slow down when compared to previous years.




Suiketu Shah

4 years ago

Kotak is not very well reputed.We would rather wait and see what moneylife has to say on this.I think the equities market shd really pick up afer 2014 elections in a big big way.



In Reply to Suiketu Shah 4 years ago

What investment cliff??

Nothing to worry . . . read the article titled
'Investor sentiment picking up: SEBI Chief' in The Hindu Business Line dated 30th October 2012 (link given below)

BSE Sensex, Nifty still undecided on the next move: Monday closing report

Will the RBI rate review help in reversing the slow downturn?

The market managed a flat close with a positive bias on the back of a smart recovery in the last hour. All eyes will now focus on the Reserve Bank of India’s monetary policy review, which takes place tomorrow. Today the Nifty moved almost in the same range as that on Friday and ended just a point above its previous close. We had mentioned in our Friday market report that the Nifty is in an indecisive zone and we may see the trend downward in the medium-term. We continue to maintain the stance. The NSE saw a volume of 53.76 crore shares and the advance decline ratio of 604:1053.
The Indian market opened in the positive following the Cabinet reshuffle, which took place on Sunday wherein 17 new faces were inducted into the government. The reshuffle saw Veerappa Moily taking charge of the petroleum ministry and Jyotiraditya Scindia being appointed as minister of state for power. On the global front, markets in Asia were trading with gains following reports of 2% growth in the US economy for the third quarter of 2012. The US markets will be closed on Monday and possibly Tuesday due to Hurricane Sandy lashing the east cost of the country.
Back home, the Nifty opened one point up at 5,665 and the Sensex resumed trade at 18,656, gaining 31 points over its close on Friday. All-round buying in early trade pushed the benchmarks to their day’s high. At the highs, the Nifty rose to 5,698 and the Sensex climbed to 18,743.
Profit taking at the highs resulted in the market paring some gains and trading sideways in subsequent trade. An increase in the selling pressure in late-morning trade and the Asian market trading lower saw the indices giving up all of their gains and venturing into the negative at around 12.30pm.
The market continued to hover on both sides of its previous close in noon trade as cautiousness set in ahead of the Reserve Bank of India’s monetary policy review, due to take place tomorrow.  A negative opening of the key European markets also added to woes of local investors.
Each recovery attempt was met with stiffer resistance, which led the market to its lows at around 2.30pm. At the lows, the Nifty slipped to 5,645 and the Sensex dropped to 18,572.
The benchmarks recovered from the lows with support from oil & gas, consumer durables and healthcare stock, which helped the market close with meagre gains. the Nifty added one point to settle at 5,666 and the Sensex ended the session at 18,636, a gain of 10 points.
Among the broader indices, the BSE Mid-cap index declined 0.43% and the BSE Small-cap index dropped 0.60%.
The top sectoral gainers were BSE Oil & Gas (up 0.62%); BSE Consumer Durables 
(up 0.51%); BSE Healthcare (up 0.27%); BSE TECk and BSE IT (up 0.13% each). The key losers were Capital Goods (down 1.69%); BSE Realty (down 0.72%); BSE Power (down 0.68%); BSE PSU (down 0.56%) and BSE Bankex (down 0.28%).
Sixteen of the 30 stocks on the Sensex closed in the positive. The main gainers were Wipro (up 2.56%); Hero MotoCorp (up 1.95%); Tata Power (up 1.82%); Dr Reddy’s Laboratories (up 1.62%) and Reliance Industries (up 1.53%). The major losers were BHEL (down 6.19%); Sterlite Industries (down 2.28%); Tata Motors (down1.80%); Coal India (down 1.11%) and Larsen & Toubro (down 1.08%).
The top two A Group gainers on the BSE were—United Breweries (up 6.51%) and JSW Energy (up 3.10%).
The top two A Group losers on the BSE were—United Spirits (down 9.15%) and BHEL (down 6.19%).
The top two B Group gainers on the BSE were—Baba Arts (up 19.80%) and Aarya Global Shares & Securities (up 18.89%0.
The top two B Group losers on the BSE were—Orissa Sponge Iron & Steel (down 12.35%) and Spectacle Infotek (down 11.11%).
Out of the 50 stocks listed on the Nifty, 26 stocks settled in the positive. The key gainers were Wipro (up 2.54%); Tata Power (up 2.15%); Hero MotoCorp (up 1.73%); Dr Reddy’s (up 1.52%) and Cipla (up 1.51%). The declining stocks were led by BHEL (down 6.58%); Tata Motors (down 2.08%); BPCL (down 1.48%); L&T (down 1.35%) and Coal India (down 1.34%).
Markets in Asia pared early gains and settled mostly lower after a slew of corporates from the region reported lacklustre earnings. The Hong Kong government has introduced a 15% tax on property purchases by overseas and corporate buyers in a bid to cut risks of a housing bubble. 
The Shanghai Composite declined 0.35%; the Hang Seng fell 0.16%; the Jakarta Composite dropped 0.18%; the Nikkei 225 shed 0.04%; the Straits Times tanked 0.91% and the Taiwan Weighted settled 0.59% lower. On the other hand, the KLSE Composite added 0.04% and the Seoul Composite ended flat.
At the time of writing, the key European markets were trading 0.58% to 0.88% lower and the US stock futures were in the negative. Financial markets in the US will remain closed on Monday on account of the nation’s capital gears for Hurricane Sandy.
Back home, institutional investors—both international and domestic—were net sellers in the equities segment on Friday. While foreign institutional investors pulled out funds amounting to Rs198.84 crore, domestic institutional investors withdrew Rs89.94 crore from equities.
Vedanta group firm Sesa Goa is likely to miss the production target of about 15 million tonne (MT) for the current fiscal due to mining ban in Goa, a senior company official said today.
During the first half of the fiscal, the company has produced about 3.7 MT iron ore. 
However, the mining ban in Goa has affected Sesa Goa's performance in the last quarter. All its operations except met coke and pig iron production are closed. Sesa Goa declined 1.18% to close at Rs167.85 on the NSE.
Coatings and specialty chemicals major AkzoNobel, launched its new initiative at its International Research Centre at Bangalore. The new initiative, India Analytical Centre (IAC), will leverage AkzoNobel’s global and local resources to provide high quality analytical services to fulfil the needs of all coatings businesses in India. The stock gained 1.19% to close at Rs968 on the NSE.
Venus Remedies today said it has received patent from Mexico for its antibiotic drug Vancoplus to combat a wide range of infections. The patent has been granted by Mexico Patent office and is valid till February 2026, Venus said in a release. The stock jumped 4.19% to settle at Rs302 on the NSE.


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