'Aadhaar' is a government scheme and has the potential to be the biggest scandal ever that would dwarf all other such swindles that have become public knowledge thus far
Some Bengaluru-based prominent citizens has issued legal notices to the Unique Identification Authority of India (UIDAI) and the Planning Commission questioning their illegal activities in implementing the UID project, or Aadhaar, without any legal authority to do so.
In a statement, VK Somasekhar, founder trustee of Grahak Shakti and Col (Ret.) Thomas Mathew of Citizens' Action Forum said, "While, politicians of all hues have waxed eloquent on the supremacy of parliamentary procedures in the Lokpal Bill matter, here is a government-sponsored project that is merrily squandering public funds, circumventing Parliament. It is astonishing to see many politicians taking every possible photo-op to have their images splashed in the media, seeking publicity for themselves, by association with this illegal project."
"We believe that Aadhaar is a government scheme which has the potential to be the biggest scandal ever that would dwarf all other such swindles that have become public knowledge thus far. The total cost of the project, variously estimated to be between Rs1.5 lakh crore to Rs15 lakh crore, has been kept under wraps. Neither the Indian government nor the UIDAI would give any figures of cost, except to say that other estimates are exaggerations," the release said.
Already, many voices have been raised against the forceful implementation of the UID project, with most objections focused on concerns over privacy. Moreover, there are issues over the legality of Aadhaar itself. The National Identification Authority of India (NIA) Bill is still pending before Parliament. It seeks to constitute a statutory authority and lay down its powers and functions, besides deciding the framework to issue the UID or Aadhaar numbers. Yet, the Indian government and the UID Authority of India (UIDAI) has gone about implementing the scheme and issuing Aadhaar numbers without any constitutional validity as yet.
According to an expert, the government is the executive not empowered by the Constitution to implement projects spending public money without legislative sanction. "In the case of UIDAI, while the executive may appoint anyone to head it, the government is legally constrained from implementing the project and issuing Aadhaar numbers," the expert said.
The NIA Bill is under the consideration of the Parliament Standing Committee on Finance, headed by former finance minister Yashwant Sinha and has members from across the political spectrum.
Mr Somasekhar and Mr Thomas said, "While we are questioning only the legality of the actions taken and being carried out by the above parties, there are other serious aspects to this project. Couched as a pro-poor and anti-corruption scheme, it is in reality, a project that would transfer unimaginably large sums of people's money to private coffers. Simultaneously, it would intrude on people's lives in ways hitherto inconceivable. It is an all-encompassing instrument of state surveillance on people."
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Contrary to the general perception that a good monsoon has a positive impact, brokerages suggest that stock markets have performed well even when there was average to above average rainfall. In addition, demand and consumption, especially in the rural market, and the health of government finances remained intact irrespective of the monsoon
In India, agriculture is the mainstay of about 58% of the rural population and contributes to a little below 15% of the gross domestic product (GDP). It is therefore assumed that a good monsoon would always have a good impact on the economy and in turn on the markets. However, over the past few years the markets have performed well when there was average to above average rainfall.
According to a research report by ICICI Securities, in the past decade, on five out of six times when India saw an average-to-above average monsoon, the Sensex posted strong gains June through October, with the only exception being in 2008.
"Good monsoons are linked to strong rural demand in sectors such as autos, fast-moving consumer goods (FMCG) and a possible pick-up in construction activity. However, our study points to a different reality, the link between monsoons and the demand impetus is at best tenuous. Further, monsoons do not seem to have a significant bearing on the health of the state governments' finances or capital formation," the report said.
In the past decade, on each of the four occasions when monsoons were moderate to good, agricultural growth was strong. Typically, a good monsoon has helped in keeping inflation under check. However, bad monsoons or deficit rainfall does not necessarily mean high inflation as extraneous factors such as crude oil prices come into play, the brokerage added.
During FY2011, for the first time in 10 years, both the Southwest (SW) and Northeast (NE) monsoon surpassed their respective long period averages (LPAs) improving reservoir levels significantly, which bodes well for kharif. The current storage is more than the last year's position of 21.54 billion cubic meters (BCM) and the average of the last 10 years' storage of 20.52 BCM.
In its latest update (1st July), the Indian Meteorological Department has said that the all India rainfall during the week to 29th June was 10% above the LPA and cumulative rainfall up to 29th June was 11% above the LPA, with normal/excess rainfall activity over all the four homogeneous regions. In the period 1st June to 29th June, out of 36 meteorological sub-divisions, the rainfall has been excess over 17 sub-divisions, normal over nine, deficient in eight and scanty in two sub-divisions. In the area-wise distribution, 74% of the country has received excess or normal rainfall and the remaining 26% area has received deficient or scanty rainfall. About 65% of the total districts in the country have received excess or normal rainfall, the Met department said.
According to ENAM Securities, a normal monsoon in FY2012E is likely to improve agricultural output prospects and ease food inflationary pressures. It must be noted that the monsoon alone cannot douse inflationary fires and the government needs urgent policy reform and fiscal stabilisation. Hence, further progress and spatial monsoon distribution will hold the key. Thus far, the monsoon seems to be progressing as per the expected timeline, the brokerage said.
The Met department has also revised its forecast for this year's monsoon to 95%, from 98% of the LPA. This implies that the whole SW monsoon season, between June and September, would most likely witness sub-normal rainfall of about 90%-96% of the LPA with a model error of +/- 4%.
"The figure of 95% rainfall forecast for this year is not alarming, but the monsoon's behaviour during the crucial month of July holds the key to the output of the summer crops, including rice, as most of the plantings take place during this month," Sharekhan said in a research report. While a good monsoon boosts sentiments across the strata, it may not be the only reason for good demand and consumption. Especially, rural demand and consumption have so far remained alienated from rainfall, whether good or average. Alternative revenue sources and easy switch to industry have lowered the impact of rains in the rural markets. The National Rural Employment Guarantee Scheme (NREGS) has increased rural household incomes apart from providing employment. The population at the bottom of the pyramid can also switch easily to other industries, which are facing manpower shortage. Traditional sources like animal husbandry are also gaining due to productivity enhancement and are yielding very attractive returns.
In addition, the onslaught of the media, developed infrastructure and the farmers' own urban experiences have given rise to a dramatic shift in consumption behaviour. Companies across the board from automobiles and FMCG to consumer durables, are expanding reach and fuelling discretionary spending through innovative pricing and packaging. The rural consumption theme would remain strong and inflation is more likely to eat into savings," Sharekhan noted.
According to ICICI Securities, sales of FMCG and consumer durables are primarily driven by lifestyle changes, disposable incomes and economic growth and much less by monsoons. Similarly, the monsoon has little impact on discretionary and non-discretionary spending and post rainy season activities. Cement dispatches, a proxy for real estate and construction activity, are less conditional on monsoons and more on broad economic activity, the brokerage added.
While a good monsoon has potential to boost total agricultural output, an average or above average monsoon provides a chance to improve incomes. According to Sharekhan, hypothetically, a normal monsoon and a bumper crop mean most produce being sold at minimum support prices (MSPs) and zero inventory gain. On the other hand a scarce monsoon means higher market prices, but little crop to be sold. However, a sub-normal monsoon combines the positives of both the worlds as price per unit sold would jump much more than the MSP and there would be potential inventory gains too, the brokerage said.
Though stock market returns and the monsoon have a strong correlation, the effect of the monsoon on the broad economy is less pronounced. However, the dwindling contribution from the agriculture sector to the GDP is a worrisome factor, that too when over 58.4% of the country's population is dependent on it for its livelihood. Over the last decade, the agriculture sector's contribution to overall GDP has fallen to under 15% from 24%. Low and volatile growth rates and the recent escalation of the agrarian crisis in several parts of the country, are a threat not only to national food security, but also to the economic well-being of the nation as a whole.
Brokerages say banks are seeing a significant growth in funds mobilisation, but lower credit off-take; public sector lenders under strain from exposure to power utilities
The banking sector is likely to have a lacklustre performance in the first quarter on account of dull domestic conditions that has resulted in lower credit growth and higher resources mobilisation, according to brokerages.
ICICIdirect.com says lower credit growth will see a dip in margins and there is a need to watch asset quality along with the stricter provisioning norms by the Reserve Bank of India (RBI). But private banks should be better off on net interest income (NII) and profit after tax (PAT) that is expected to grow by 22% and 32% year-on-year, respectively.
The brokerage estimates that Yes Bank's non-interest income growth will be much better at 29%. But lower credit off-take and higher yields are impacting treasury, the brokerage says, and operating expenses are expected to rise with the opening of new branches during the first quarter. PAT growth should be a healthy 49% y-o-y.
Angel Broking observes that credit demand has declined to around 20%, whereas deposit growth has increased to over 18% in the period, as a sharp hike in lending rates has affected credit off-take, while continually increasing deposit rates over the past six months has resulted in a pick up in mobilisation. Consequently, much of the funds mobilised has been deployed at a negative spread in government bonds.
Also, the RBI hiked savings bank rate by 50 basis points to 4% on 3 May 2011, for the first time in 19 years, reducing the spread between savings deposit and term deposit rates, which has widened significantly recently.
Brics Securities expects Punjab National Bank (PNB) to take an earnings hit of 2.5% to 9.9%, mainly due to the overhang of power sector exposure and restructured asset slippages. Estimated EPS for 2011-12 is down by 1.2 % to factor in restructured asset provisioning (Rs155 crore) according to new RBI guidelines.
Of the entire power sector exposure, the share of private power generation companies is 62 % (about Rs13,200 crore), state electricity boards at 23% (Rs5,000 crore) and state generation companies/utility companies at 8% (Rs1,600 crore). In the event of asset quality slippages in the power sector due to fuel shortage, PNB is likely to take a hit from reversal of accrued interest income and provisioning expenses.
According to KR Choksey Institutional Research, state electricity utilities are making losses by selling power below the cost of purchase. Only 16 electricity utilities have revised tariffs to adjusted higher fuel cost. This is indicative of the woes of PNB and other power sector lenders.
Overall on the banking sector, KR Choksey believes that NII growth and fee income are likely to remain healthy on the back of robust loan growth. Compression in margins coupled with slippage from stressed sectors like small and medium enterprises and micro-finance institutions could act as earning dampeners.
Moderation in the credit-deposit ratio and the rising cost of funds are key drivers for margin compression during the quarter. Margins of most banks are likely to be under pressure due to rising cost of funds and slowdown in credit off-take. Given the fragile credit demand, banks may absorb about 50% rise in cost of funds.
The sector's margins have peaked and are likely to contract by about 10-15 basis points quarter-on-quarter (q-o-q). NII of banks under coverage is likely to grow by 21.9% y-o-y and 2.2% q-o-q. Earnings are likely to grow by 13.1% y-o-y and 33.8% q-o-q (excluding State Bank of India for which earnings are estimated at 16.4% y-o-y and 6.7% q-o-q). Earnings of private banks are expected to grow by 36.6% y-o-y and a negative 1.7% q-o-q.
Sharekhan estimates moderate earnings growth for the banking sector in the first quarter. This would be due to a dip in margins and increased provisions. It expects banks to post a moderate growth in top-line due to modest credit off-take and pressure on margins due to rising rates. Though banks have increased lending rates, the lag impact of rise in funding costs and increase in savings deposit rates will impact margins. In addition the higher non-performing asset (NPA) provisions (due to revised norms) and higher employee expenses (due to amortisation of pension expenses) would hit profit growth y-o-y.
With inflation expected to cool down in the second half of 2011-12, pressure on the banking sector could ease going forward. For now, though, when returns are healthy for depositors, but funds costly for borrowers, it could be a difficult period for investors as they look for bargains at lower levels.