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.
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 (
http://foundation.moneylife.in/article/position-paper-on-issues-faced-by-retail-investors-an-insight-into-declining-participation-of-the-retail-investor/12486.html). 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. (
http://www.moneylife.in/article/needed-financial-literacy-for-regulators/28299.html)
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 (
http://www.moneylife.in/article/markets-shrug-off-sps-negative-outlook/25193.html) and (
http://www.moneylife.in/article/sec-keeps-credit-ratings-game-rigged-in-the-us/25385.html).
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.
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)
http://www.thehindubusinessline.com/mark...