Even if the BJP-led government comes to power, it may not mean the start of an investment cycle, cautions Credit Suisse because only a fourth of projects are stuck with the central government; the rest are constrained by overcapacity, balance sheets, or state governments
At the cusp of elections that can transform the policy-making and administrative landscape, India's prospects are in stark contrast to the troubles in several Emerging Markets (EMs). However, don’t get your hopes too high, says Credit Suisse. Although hopes are high among investors that elections can re-start the investment cycle, it may not happen easily, feels the investment banking firm.
According to a Credit Suisse research report, there are four possibilities post the general elections. One, Narendra Modi leading the National Democratic Alliance (NDA) government with just two-three partners. Second, Modi leading the government with five-six allies. Third NDA leader other than Modi leading the government with 8-10 allies and last, the third front government with outside support from Congress. What are the economic prospects under each of these scenarios?
Opinion polls have predicted a stronger victory for the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), and currently put 230+ seats for the alliance.
However, Credit Suisse says, "We find the opinion polls an unreliable indicator of the upcoming election results, due to the flaws in raw data collection; insufficient sampling given the large variations in voting behaviour and subjective interpretation. However, in the absence of any better predictions, the market is likely to assume the opinion polls as indicative."
According to the research report, the performance in the immediate aftermath of election results is likely to be dependent on the electoral outcome. "Given the recent opinion poll results and the resultant market excitement, we believe the market's base case is Scenario I, i.e. 220+ seats for the NDA. This would enable the BJP to form a government with far fewer allies, possibly just two-three (272 is the number of seats needed for majority), with several other potential allies waiting in the wings for an opportunity. Such a government would be stable and strong, and excite the market, as it would allow for administrative stability and meaningful legislative action," it said.
Third front government?
According to Credit Suisse, in an extreme result, though much less likely would be if the BJP-led NDA gets less than 180 seats, which could open the possibility of a third front government or a coalition of disparate regional parties, which have no common agenda. Congress may end up supporting this government from the outside, i.e. it would not have any ministers, but would vote with the government on various issues.
"Such a scenario could potentially drive a ratings downgrade a few months later, and investors may be apprehensive of redemptions and an outflow of funds from India that cannot invest in economies rated below investment grade," Credit Suisse said.
New coalition with/without Modi as PM
Between the two extremes, where BJP-led NDA would secure more than 220 seats or less than 180 seats, there are two scenarios, as per the research report. One is a not so emphatic verdict in favour of the BJP-led NDA, driving them into uncomfortable alliances, which would constrain their reformist tendencies, at least in the eyes of the market. Within these two, the markets may be more enthused by Scenario II than Scenario III. “If the BJP-led NDA were to get less than 200 seats, the necessity of forging a coalition could potentially see a leader other than Narendra Modi becoming the Prime Minister," Credit Suisse said.
"However," it added, "we believe the market's early optimism is misplaced. Based on constituency-wise analysis of earlier election results and how strongly vote share can swing in one election shows the far more likely scenario is 190-204."
Elections won't kick-start investments
According to Credit Suisse, over the last three years, India has seen a sharp slowdown in investment. Hopes are high among investors that particular electoral verdicts can kick-start investments in a short period of time. But "even if the electoral verdict is favourable, such misplaced optimism ignores the realities of the business cycle, and overestimates the powers of the central government. Only a fourth of investment projects under implementation are stuck with the central government; the rest are constrained by overcapacity, balance sheets, or state governments," the report says.
Credit Suisse said, "Two-thirds of the projects awaiting central approval are in Power and Steel sectors, both wracked with massive overcapacity, obviating new investments. True utilisation in thermal power generation is below 60%, near 20-year lows (reported PLF is 65%). Of the litany of problems in the sector, two are crucial: state electricity board (SEB) reforms, and coal availability. The sudden stoppage of working capital loans to SEBs, risks of fuel price pass-through schemes, and stalled reduction in AT&C losses has hurt demand growth. The central government cannot revive it: state governments need to. Similarly, solutions for anaemic coal production growth i.e., restructuring Coal India and coal block auctions are likely to take several years."
Talking about challenges everywhere, the report says legal challenges are likely to stall the National Highways projects, and matter less for India's road network; Railways lacks financial muscle, and private partnership schemes are yet to take off. The government may also struggle to give a fiscal boost as the underlying stresses in government finances remain.
Going forward, Credit Suisse said, it sees three distinct phases in the Indian market. (1) the run-up to the elections, (2) the period immediately after elections (say three months), and (3) the period that ends with the calendar year 2014, where economic delivery and earnings changes will drive the market.
"Unlike a mean-reversal rally where investors jump on to stocks that had fallen the most in the prior period, the recent rally has focused on sectors benefiting from a revival in large-scale infrastructure investment. With the sectors that had outperformed thus far, i.e. IT, healthcare and staples remaining unchanged, the Indian market has been among the best performing globally in the past month," it said.
According to Credit Suisse, irrespective of which of the Scenarios plays out, the markets are likely to discover that the path of the economy hasn't changed and earnings trajectories of various sectors are unchanged. "In this phase, 'defensive' sectors like IT, healthcare and staples, and more bottom-up stories like in energy or consumer discretionary are likely to outperform, in our view," the report concludes.
Several doctors, who studied in the Commonwealth of Independent States or CIS countries are practising in India without fulfilling necessary formalities and taking permission from the MCI
The Central Bureau of Investigation (CBI) on Thursday launched a nationwide operation against medical practitioners operating on the basis of fake degrees and documents obtained from the Medical Council of India (MCI).
According to sources, CBI has got information that several doctors, who studied in the Commonwealth of Independent States (CIS) countries are practising in India without fulfilling necessary formalities.
It also came to light that some of them allegedly colluded with officers from MCI, who gave them permission to practice in exchange of illegal gratification even as the doctors did not fulfil necessary parameters.
“When the report came to us, we viewed it with utmost seriousness and today after finalising the first information report (FIR), we have carried out nationwide searches,” CBI Director Ranjit Sinha told reporters.
The sources said CBI started a coordinated search operation across the country. “This is an important case as such people were playing with the lives of patients,” Sinha said.
Earlier this month, Arvind Kejriwal-led Aam Admi Party (AAP) has accused Congress, Bharatiya Janata Party (BJP) and Samajwadi Party (SP) providing patronage to Dr Ketan Desai, the former chief of MCI. According to AAP, despite the ongoing criminal cases pending against Dr Desai, these parties are helping him to gain re-entry in the MCI, which oversees medical education in the country.
In 2012, the Central Bureau of Investigation (CBI) had filed a charge sheet against Dr Desai for allegedly taking bribe from the management of a Patiala-based private medical college. He was also arrested later. In 2001, the Delhi High Court had removed Desai as MCI president on charges of 'misuse of office'.
After the arrest of Dr Desai in April 2010, MCI was dissolved by the government and a board of governors managed the affairs of the Council for three and half years. However the MCI was again restored in early November 2013 by the government.
The crisis in Ukraine may give India an opportunity to export more wheat, provided we ship out more, as our central pool stood at 24.2 million tonnes, twice more than the buffer and strategic needs
Despite the US and European threats and entreaties, Russia went ahead supporting the referendum, which overwhelmingly approved Crimea to become a member state of Russia. In effect, this peninsula was part of Ukraine and is now under Russian control.
Indian trade with Commonwealth of Independent States (CIS) has been growing in the last few years and in 2012-13, the total trade between India and Ukraine amounted to $3.18 billion. While Ukraine exports edible oils, petroleum products and fertilisers, Indian exports cover a number of products, of which pharmaceuticals supplies alone have grown, in recent years, to $154 million. After Russia, it is Ukraine, the second largest trading partner for India, in the CIS group. Indian trade with CIS amounted to $11.58 billion
Apart from natural gas, which Ukraine is estimated to have large reserves, it is also a serious Wheat supplier in the international market, often in competition with Indian bids.
In the case of wheat supplies from India, many times we have lost international contracts due to better offers from Ukraine. With the current crisis on hand, it is just possible, that Ukraine may refrain from offering its wheat. Traders in this grain have been looking at France, as a nearby alternative. It is believed that due to Crimea's move to join Russia, the spring grain to be sown this year in Crimea could be delayed, and, in any case, it is unlikely to be available for export via Ukraine. It is reported that the grain output in Crimea is 1.2% of Ukraine's overall harvest in 2013.
Ukraine expects to export 10 million tonnes of wheat, between July 2013 and June 2014, but, already, in January, they have been able to ship out 7 million tonnes, to avoid the crisis that was looming large at that time.
As of now, Indian wheat tenders, floated by both MMTC and PEC have received prices in the range of $282 as against the indicated "floor price" of $260 per tonne. A total of 150,000 tonnes are on offer, with 80,000 tonnes ex- Kakinada port (MMTC received bids at $281.05), while 70,000 tonnes ex-Kandla port (PEC received bids at $ 282.10) from some 17 bidders.
It would be in our national interest to probe the possibilities of "accepting" more than one or two bids, even if by negotiation, to ship out more wheat from the country, as our central pool stood at 24.2 million tonnes, twice more than the buffer and strategic needs. At all costs exports we must, and exceed the target of five million tonnes from both private and public stocks, bearing in mind that there are weather issues in the US, affecting their crop and the political crisis in Ukraine is not yet over.
Nature has played against India too, in the form of hailstorm in Madhya Pradesh, which is reported to have shrunk the estimated crop size by two million tonnes, according the state government. Yet, the current overflowing stocks in the FCI godowns have to be cleared soon and make way for the new arrivals, when harvests take place in the next few weeks.
At the moment, India is a helpless spectator in this crisis and we need to watch the situation carefully. Russia may even face the prospect of economic sanctions from the West, though, the thought of reaction from gas supplies, which account for 20% of its export revenues may result in both sides exercising great caution not to take the wrong step in this matter.
As is usual, India may have to tow the line of the UN resolutions, if any, on this issue!
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)