Nomura’s political analyst, Alastair Newton, expects a BJP-led coalition to form a government at the centre. In addition Nomura sees India to begin economic recovery only from the second half of 2014, subject to a ‘stable government’
India’s economic recovery will happen only in second half of 2014 subject to a stable government says Nomura even as it sees the Bharatiya Janata Party (BJP)-led coalition forming government at the centre.
In a research note titled ‘Global Outlook 2014’, Nomura said one of the key reasons why it is cautious about Indian economy is politics in the country. “Political stability and policy credibility are paramount to corporates making long-term investment decisions. Politics is the key downside risk domestically. A third front government (a coalition consisting of neither BJP nor the Congress) or a fractured mandate in the upcoming elections would further slow the reform momentum and lower India’s potential growth,” the note said.
However, Nomura’s political analyst, Alastair Newton, expects a BJP-led coalition to form a government at the centre.
Talking about economic recovery and inflation worries, Nomura said, “With growth bottoming out and (Indian) inflation likely to remain stubbornly high, we expect another 50bp in cumulative repo rate hikes in 2014”.
Nomura said it expects the Indian economy to grow at 4.8% in 2014 and 5.7% in 2015, faster than global growth. Nomura expect global economy to expand 3.4% and 3.7% for 2014 and 2015 respectively, while the growth in Asian region would be 5.2% and 5.3% during the same period.
Nomura also forecast the Indian rupee touching 65.5 against the US dollar by 2015. However, it expects recovery to be a slow and gradual process. The note said, “Our forecast growth recovery is more gradual than India’s past cycles due to the leveraged balance sheets of corporates, higher non-performing assets on bank balance sheets and higher interest rates.”
“We expect inflation to remain stubbornly high due to elevated inflation expectations, food-related supply shocks and the recent upswing in rural wage growth,” stated the note.
Nomura has forecasted consumer price index (CPI), or inflation, hitting 9.3% (year-on-year) and 8.7% y-o-y for 2014 and 2015 respectively. Nomura also expects policy rates to be 8.25% by 2014 and 2015 as well. This is likely to slow down the Indian economy.
They feel that there is a likelihood of a bond index being introduced in India because the Indian economy cannot rely on external conditions for long, especially with risk of deficits widening and rupee depreciating. “Although external sector risks have fallen considerably, they could re-emerge early next year. India has managed to significantly lower its current account deficit due to external factors (better exports) and one-off policy restrictions (on gold imports). However, with the economy still running a deficit, capital outflows stoked by Fed tapering could put pressure the balance of payments once again. During this time, policymakers could announce India’s inclusion in global government bond indices,” it added.
The global report has opined other countries as well. They expect the US as well as Japan economies to sustain and grow, thanks to the monetary stimulus of the respective countries. The Euro area will be at a risk of “secular stagnation”, according to the Nomura note. Nomura isn’t bullish on China either, stating that tightening will happen which will slow down the economy. “We expect China's economic growth to slow amid policy tightening, while structural reform will gradually kick in, causing short-term pain,” the Nomura report said.
NSDL’s IPO case is a reminder that former SEBI chairman appointment was made under the most bizarre circumstances
The Securities and Exchange Board of India (SEBI) has challenged an order of the Securities Appellate Tribunal (SAT) letting off the National Securities Depository Limited (NSDL) for its role in the multiple-application scam of 2003-05 and more serious lapses in DSQ Software’s dubious increase in capital just after the dotcom bubble. This has happened soon after the third public interest litigation (PIL) questioning chairman UK Sinha’s appointment was thrown out by the Supreme Court (SC). On 19th November, India’s apex court has asked NSDL to file a response to SEBI’s challenge, giving a fresh life to the most bizarre, but hardly-reported, case in the 25-year life of India’s market watchdog.
CB Bhave shepherded the depository statute through Parliament as executive director at SEBI and went on to found NSDL and head it for the largest number of years in its existence. The depository grew rapidly and extended its operations into tax information and other areas, far beyond SEBI’s ambit.
NSDL’s aura of high efficiency was shattered after an income-tax investigation stumbled on a massive multiple-application scam which had gone unnoticed by the depository, even though the applicants brazenly consolidated thousands of allotments into a few depository accounts before the shares of a manipulated initial public offering (IPO) were listed.
It seemed astonishing that NSDL’s systems were unable to detect multiple applications. But what was scandalous is the saga after that. Under chairman M Damodaran, SEBI ordered an inquiry that indicted NSDL. The depository managed to raise a storm of outrage.
Soon after, Mr Bhave was appointed SEBI chairman, despite pending investigation and regulatory action. An artificial ring-fence was created around Mr Bhave to allow a fair investigation of the IPO scam to continue, but the signal from the finance ministry was clearly that NSDL was wrongly indicted.
In a strange twist, a two-member committee of the SEBI board again indicted NSDL and also discovered the DSQ episode. The report of 2008 lay buried for a year and was made public only when Dr Mohan Gopal, a member of the committee, went public after a PIL was filed in an Andhra Pradesh court.
Did this lead to action against NSDL? No. In fact, the SEBI board, in a bizarre decision, declared the orders of its own committee as void in February 2010! In the process, the board also ignored a legal opinion from none other than the late Justice JS Varma, an extremely respected former chief justice of the Supreme Court.
Finally, SEBI was asked to reconsider its order by the Supreme Court in July 2011. NSDL was then ordered to conduct an inquiry and fix responsibility for the lapses and it challenged the SEBI order before the SAT.
Meanwhile, the case dragged on; Mr Bhave’s term was not extended; this led to several PILs being filed against UK Sinha’s appointment which the apex court has recently called ‘motivated’. NSDL was also bifurcated, to set right issues with its regulation and supervision that Moneylife had pointed out.
Interestingly, in August 2013, SAT decided to quash SEBI’s order of 2008 (implemented only in 2011) saying that fixing individual responsibility at this belated stage was ‘unjustified and unreasonable’. SEBI has challenged the SAT dismissal, ensuring that the highest court in the country hears this sordid saga involving repeated perversion of power, motivated appointments to the SEBI chairman’s post and evasion of responsibility for the IPO scam.
Will the next PFRDA chairman be another bureaucrat on a sinecure after exodus of PFRDA chairman Yogesh Agarwal?
The process of appointing and supervising the many independent regulators in the financial sector is clearly breaking down. Over the past few years, Moneylife has repeatedly pointed out how independent regulators are not exactly pro-consumers even as they have been armed with extraordinary powers, due to the disinterest of the finance ministry and the parliamentarians on the standing committee of finance. Our attention was mainly focused on the capital market regulator, insurance regulator and the banking regulator.
The pension regulator, Yogesh Agarwal, flew below the radar because he operated without an empowering statute and also because the National Pension System (NPS) had failed to attract investors. Then, on 12th November, just two months after Pension Fund Regulatory and Development Authority (PFRDA) got its statutory teeth, came the startling news that Mr Agarwal has been asked to resign.
The exit came a year and half before his term was to expire and without any explanation beyond unattributed comments that he wasn’t getting along with finance ministry bureaucrats. My sources say that the PFRDA did not hold board meetings and there was some rumbling about frequent foreign trips and some questionable appointments at PFRDA during his tenure. He was even kept out of the selection committee to appoint whole-time members. Mr Agarwal has apparently chosen to remain silent about the reasons for his exit.
PFRDA oversees the defined contribution NPS which has over 5.3 million subscribers and a Rs35,000 crore corpus of mainly government employees on whom this scheme was thrust in 2004. When NPS was first launched, Moneylife was extremely bullish about the product as a safe, long-term investment.
However, in the absence of distribution commissions, neither banks nor independent advisors had any interest in pushing the scheme. Our view turned negative soon after Mr Agarwal took over and began to tinker with the scheme. Our view remained negative, even though the government tried to push the product by contributing Rs1,000 per year to each subscriber for four years.
In January 2013, Moneylife wrote, “A retirement product should be less volatile, small on charges, big on tax benefits and flexible after retirement.” We had pointed out that, over 2009-11, returns of the scheme for the unorganised sector had varied from 23.51% to -3.15%, although NPS investments are supposed to be strait-jacketed.
This is bound to scare away savers who simply cannot afford volatility on a pension plan. Also, if this was the volatility in just three years, what would be the fate of the pensions over 30 years? The product was further marred by high fixed transaction charges, which would deplete the savings of small investors, rendering the product unattractive for them. PFRDA also increased the investment management fee and allowed fund managers to revise it every year. For long-term investors, who are expected to lock their funds for several decades, this uncertainty and tinkering killed the product and Moneylife refuses to endorse it anymore.
Typical of India’s financial regulators and the ministry, these concerns were never even acknowledged, let alone addressed. Will things change now that the PFRDA chairman has been asked to go? Or will he merely be replaced by a retired bureaucrat after going through the motions of an elaborate selection process? The SEBI saga outlined in the next report only shows the urgent need for greater transparency and accountability in selecting independent regulators in India.