Indian Economy - News & Discussion Oct 12 2013

[Vamsee]

Jan Dhan scheme: LPG subsidy transfer sees zero-balance a/cs drop below 50%

Looks like JAM will end up as the killer app for Modi sarkar. It is tangible and each family can see their benefits flow to them directly.

[Suraj]

Jan Dhan scheme: LPG subsidy transfer sees zero-balance a/cs drop below 50%

Looks like JAM will end up as the killer app for Modi sarkar. It is tangible and each family can see their benefits flow to them directly.

The number of accounts themselves is huge. The official website states 173 million accounts at the end of July and ~152 million RuPay cards, with total deposit base of Rs.21,000 crore. The original target for this scheme was 75 million accounts. At the end of last year, there were criticisms about how >50% of the accounts have zero balance. But that percentage has not changed, which means that in absolute terms the number of accounts with positive cash balance is growing dramatically. The latest news just means ~88 million new accounts have a positive balance, which is more than the original goal for account creation itself.

Household coverage already hit close to 100% after around 120 million new accounts were opened. So the additional accounts beyond that threshold are to multiple individuals in a household. In other words, PMJDY has already gone well past its initial brief of bridging the lack of coverage for the underbanked rural and poor. It's being expanded to a nationwide direct benefit transfer system, and its progress has been rapid. Modi should have more hard numbers in his I-day speech.

GoI has already begun a limited program of moving PDS to the PMJDY DBT system. Taking the scope for skimming money out of the middleman's hand by implementing a system that directly transfers benefits, is classic Modi. The long term plan is to offer pretty much all public services via these accounts - food subsidy, fuel subsidy, insurance cover, pension payments...

[arshyam]

Vamsee saar, have posted that article on the achievements thread. Thanks for sharing it.

[arshyam]

Taking the scope for skimming money out of the middleman's hand by implementing a system that directly transfers benefits, is classic Modi.

True, see here for an anecdotal example.

[Theo_Fidel]

The direct cash transfer is a true progressive solution. It has shown some real promise in areas it has been tried. It will finally bring the poor into the cash economy rather than the barter economy where lenders under compensate and overcharge and exploit them. It should also give a real boost to the rural economy by directly stimulating local sales and taxes. At present the MNREGA and PDS is not taxed at the local level so district and panchayat administration is not benefited.

The one caveat I have is that what has worked is a 'conditional' transfer program. Cash in return people should be asked to commit to certain things. Says ensure all girls from the village are in school or a 10% withholding will occur for a truancy officer. Ensure all births are at the local PHC, women get iron and vitamin supplements, 100% vaccine coverage should be demanded, maybe 10% coverage increase every year. Delay marriage of girls to 21 years and first pregnancy to that age. Things of that nature. I know it seems a little odious to pay people to put their kids in school or feed them properly but we are in desperation stations at this point.

P.S. One other thing. There is terrible paucity of ATM machines in rural areas/villages even in places like TN & KL. I have gotten into trouble recently due to this. Need more ATM coverage to ensure this scheme works.

[ShauryaT]

The Indian Financial Code - The Good, the Bad and the Ugly

The Government of India has gone against the spirit and content of the comprehensive recommendations of the 2013 report of the Financial Sector Legislative Reforms Commission. It has revised the commission's draft Indian Financial Code (which had its own pluses and minuses) with a second draft code which, among other things, will lead to a greater centralisation of powers with the government and a weakening of the independence of the Reserve Bank of India. This is best illustrated in the recommended composition and powers of the Monetary Policy Committee. The finance ministry cannot hide behind the claim that this is a draft code; the revised draft IFC has been drawn up within the ministry.

[Suraj]

The Indian Financial Code - The Good, the Bad and the Ugly

The Government of India has gone against the spirit and content of the comprehensive recommendations of the 2013 report of the Financial Sector Legislative Reforms Commission.

It's worth pointing out that the FSLRC itself is a very new entity, created during the time of the prior administration, which favored external non-constitutional decision making and advisory bodies, whether it was the NAC for legislative actions, or the FSLRC for financial reforms.
Financial Sector Legislative Reforms Commission

The Financial Sector Legislative Reforms Commission (FSLRC) is a body set up by the Government of India, Ministry of Finance, on 24 March 2011, to review and rewrite the legal-institutional architecture of the Indian financial sector. This Commission is chaired by a former Judge of the Supreme Court of India, Justice B. N. Srikrishna and has an eclectic mix of expert members drawn from the fields of finance, economics, public administration, law etc.

The current administration is not obligated to follow the recommendations of a report submitted in 2013, a year before its time, by a committee that's not its creation. They can make a good faith effort to accept the recommendations that suits its imperatives, but they're also perfectly capable of winding up the FSLRC itself, if they so wish. The power of the legislature and executive is paramount in all matters related to economy and finance.

[kmkraoind]

Experts advise PM Narendra Modi-led government against drastic change in consent clause of land acquisition law

The UPA may have in spirit attempted to bring in a stringent law by making prior consent mandatory for land acquisition but either a drafting error or mere oversight has left a significant chink giving a considerable leeway to industry.

The change in government's view has been prompted by fresh legal opinion that relies primarily on what is contained in section 2(1) of the 2013 Act. It provides for land acquisition, compensation, rehabilitation and resettlement but clearly but clearly skips the word 'consent', which is mentioned in section 2.2.

"Land acquisition, compensation, rehabilitation and resettlement when the appropriate government acquires land for its own use, hold and control including for public sector undertaking and for public purpose, and shall include....," it says.

Consent is not only missing from this crucial provision but also the extent of consent required, as elaborated in detail in section 2.2 of the act, is not mentioned.

The government reckons this means land can be acquired under this provision for all infrastructure sectors notified by the department of economic affairs barring private hospitals, hotels and educational institutions. Thus land required for agro processing industries, projects for industrial corridors, national investment and manufacturing zones and housing can be acquired sans prior consent, as per the government's latest interpretation of the 2013 act. Thus, effectively government can acquire land and while keeping the ownership with itself lease plots for development of industry, according to fresh legal opinion available with the government.
......
The social impact provision in the 2013 act only provides upper limit with regard to time and states can prescribe a threshold to curtail the period from 52 months to 90 days or so.

[somnath]

Thats inaccurate.

Every central bank has assets and reserves.

Assets are things like Gold. Reserves are things denominated in foreign currencies. NO central bank holds foreign currency. They hold bonds in that currency. THe purpose of reserves is to buy your own currency (for RBI - INR) overseas when it is being attacked by speculators. By selling reserves (i.e. bonds mostly) they reduce the amount of INR available overseas. THis reduces the ammunition that speculators have. IN technical terms, they are prevented from shorting the rupee. Assets on the other hand are used as a last resort thing. WHen you run out of reserves, then you use assets. Remember 1991?

The financial journalists do not understand these basics and they are pulling things out of their collective arses and want us to listen to them.

Financial journos are generally clueless (and non-rigorous with simple data), but in this case the general tenor of the article is correct.

Foreign exchange reserves are a balancing number in RBI's balance sheet, representing the net accumulation of foreign exchange flows into the country. These reserves are deployed in a variety of instruments, USD treasuries being the most popular, but also other govies, bonds, SDRs (essentially "equity" with IMF) and Gold. The article of course made the obligatory error in saying that Gold represents 15% of Indian forex reserves (its only around 5%)

http://rbidocs.rbi.org.in/rdocs/Wss/PDF ... 6E183F.PDF

But it is a fact that the USD value of reserves is impacted by the valuation of the assets held as reserves, including that of Gold which has been coming off sharply over the last few months.

You make a couple of errors yourself:

1. There is no INR available "overseas", INR is not a convertible ccy. All overseas trades in INR are in "non deliverable" form, which means that no counterparty can take delivery of INR overseas, the trade is settled in cash (USD).

2. No one needs physical INR to "short" the currency, the NDF market is good enough to do so.

Reserves are not "assets" of the nation unless they have been created by non-liability generating surpluses (typically exports and proceeds from offshore assets held by residents). In India's case, as a country running consistent trade deficits, all our reserves have an attendant liability against them (either to FPIs, or NRI depositors, or multilateral agencies like World Bank/JICA etc).

[hnair]

P.S. One other thing. There is terrible paucity of ATM machines in rural areas/villages even in places like TN & KL. I have gotten into trouble recently due to this. Need more ATM coverage to ensure this scheme works.

The ATM spread is tapering off and the banks are nudging all vendors to use ATM cards. The HDFC zonal head for Kerala is a classmate during engineering. So I was asking him why he is not starting one near my in-law's place in Malabar, so I dont have to cop a noor-rupa off Pa-in-laaa, for a soda.... He says average cost of 1lac/month for operating an ATM in urban area is not adding up. Rural means electricity issues that need to be sorted out by inverters et al. Says they are aggressively marketing the GPRS enabled swipe card reader, even in remote areas of Kerala, so they dont have to open ATMs. He said he had shut down a few ATMs in the past few months in Trivandrum, Kochi and Calicut, particularly near higher end retail outlets, due to lack of transactions.

In Kerala, the red-colored Muthoot group started ATMs recently and it fits more their model to open next to their gold finance franchises. Probably a first step to a banking license, that the Grand Chettiar did not give them, but apparently Shree Modi has promised them

But then with the swiper leaving an audit trail, Malabar birathers are forced to pay sales tax et al, which kind of defeats the purpose of "cash onlee, mwonjaaa!". So I think there will be need for ATMs too.

Dont know, but TN too might be going through the same.

[somnath]

^^^ATMs are not "profit centres" for banks - interchange fees from txns dont justify the cost of running the ATM (real estate, security, electricyt) even on high street locations. Banks typically have ATMs for 2 reasons:

1. Create stickiness for accounts opened with the bank - CASA balances have the biggest margins.
2. Branding - the ATM acts as a perennial source of ATL marketing as a collateral benefit.

Increasingly, both the above are being undercut at the margin - ATM/Debit cards can be swiped in any ATM. As long as the issuing bank doesnt charge for using a non-issuing bank ATM, the customer is indifferent. Increased rentals for ATM space is taking away the marginal benefit of cheaper branding/marketing costs.

Going forward, ATMs will go the way of tower companies for Telcos. There would be dedicated service providers putting up ATMs that can be shared by banks across the board, thereby reducing costs. The first push will be once payment banks come into vogue - expect them to be the first mover in using such common facilities.

For financial inclusion, the first thing the govt should do is to grant a banking license to Post Office - they have a bigger spread than any ATM netowrk would have in the next 25 years, and they have migrated to electronic CBS.

[Suraj]

Business Standard is reporting a multi-part article series on GoI's Rs.12.91 lakh crore ($210 billion) investment plan. The two main sectors - power and infrastructure, have been covered so far:
Power Sector
Infrastructure

[panduranghari]

Many thanks Somnath ji. THough INR is not convertible, the idea I wanted to convey (for the sake of simplicity) is we can confuse 2 very distinct ideas and assume both are identical. They are identical from the perspective of the ability to repay the debts. However, they are very different when we intend to use the same for creating something tangible. Without trying to be too smart, I would use the Chinese example - they are using their reserves to prevent renminbi devaluation but in doing so they are screwing their own balance sheet. Its very tangential to the discussion but the delineation of the 2 classes of capital - assets and reserves - is becoming very blurred. Thank you again.

[Austin]

How China's Devaluation of Renminbi Impacts India

http://profit.ndtv.com/news/economy/art ... ome-latest

[somnath]

Many thanks Somnath ji. THough INR is not convertible, the idea I wanted to convey (for the sake of simplicity) is we can confuse 2 very distinct ideas and assume both are identical. They are identical from the perspective of the ability to repay the debts. However, they are very different when we intend to use the same for creating something tangible. Without trying to be too smart, I would use the Chinese example - they are using their reserves to prevent renminbi devaluation but in doing so they are screwing their own balance sheet. Its very tangential to the discussion but the delineation of the 2 classes of capital - assets and reserves - is becoming very blurred. Thank you again.

Not sure I understand what you are saying, but it is a fact that buying up excess foreign ccy to prevent the local currency from appreciating isnt a "free" exercise. Typically, when RBI buys up dollars to prevent INR from appreciating (in times of excess forex flows), it releases INR in the system. But increasing INR supply puts upward pressure on inflation. So simulatenously RBI issues bonds to suck the INR out and neutralise teh impact. The problem is this though - on the INR bonds issued RBI pays ~8%, while the USD it buys and deploys in US govies it get ~2% - a 6% negative spread. It can blow a hole in the budget if not kept within manageable limits.

China has done the above for a long period of time, but then both USD and CNY swap rates are pretty low, in the 1-2% range, and hence there hasnt been a big negative spread.

As I said, forex reserves are not "assets" of the sovereign - a lot of people in India believe that erroneously. Not unless those reserves have been created by non-liability generating excess forex flows, which is never the case with India.

The CNY deval is a first step - expect China to muscle in a lot more aggressively as it tries to reshape its economy, after all it kept a devalued currency for 25 years!

[Arjun]

Monsoon session washout: India Inc blames Congress-led opposition for stalling growth

[Vayutuvan]

Good. I hope the above gets publicized in the local and vernacular media too. I will do my own little spreading in my social network circles.

[Melwyn]

Monsoon session washout: India Inc blames Congress-led opposition for stalling growth

Is this really the Times of India? Is this on print edition?

[chaitanya]

State Bank of India sees bad loan pressures easing

SBI Chairman Arundhati Bhattacharya, who has been taking steps to reduce its pile of sour debt, said loans to smaller companies remained a problem area but mid-sized and large companies' accounts were stabilising.

[A_Gupta]

Moody's links India's credit rating to drought vulnerability
http://www.business-standard.com/articl ... 216_1.html

India may avoid drought this year, but its economy remains vulnerable to fluctuations in annual rainfall, a factor that continues to constrain the country's sovereign credit, Moody's Investors Service said today.

But India's vulnerability to drought will come down if the government's efforts to improve infrastructure, food distribution and non-agricultural employment opportunities were successful.

"These efforts would also benefit India's overall sovereign credit profile because they would lead to higher incomes, a stable and lower inflation, and a lower fiscal burden related to food subsidies," it said a report titled 'Vulnerability to Drought Poses Credit Challenges'.

India's sovereign credit profile was more vulnerable to drought than most of its Baa-rated peers because of the relatively high share of agriculture in GDP and employment, weak rural infrastructure, inefficient food distribution and the relative share of food subsidy cost in the fiscal deficit.

[Theo_Fidel]

He says average cost of 1lac/month for operating an ATM in urban area is not adding up. Rural means electricity issues that need to be sorted out by inverters et al. Says they are aggressively marketing the GPRS enabled swipe card reader, even in remote areas of Kerala, so they dont have to open ATMs. He said he had shut down a few ATMs in the past few months in Trivandrum, Kochi and Calicut, particularly near higher end retail outlets, due to lack of transactions.

Dont know, but TN too might be going through the same.

HNair saab,

TN has a good network but not by world standards. edit.

Yes the number seems to be in line with operating costs world over. Though in India there is invariably a security guard and A/C enclosure. The SBI ATM’s I use very definitely charge me fees. It was Rs 22.50 or some such random number. Not much but noticeable. So it would require ~ 500 transactions pm to justify the cost. This is not a lot if you ask me. About 15 per day. The problem with rural India is as you commented, it is a cash/barter economy. No bank account trail to follow. If the cash transfer scheme is implement correctly it should easy cover this transaction number pm. And should gradually bring more and more of the economy into the daylight.

Of course the start-up phase would be tricky. But right now there is no-where near enough ATM’s even in relatively large towns. Right now there is no ATM in Vallioor and no ATM in sooudarapandyapuram. Relatively large towns. In places like Chattisgarh, outside the 2-3 large commercial cities there are no ATM’s that I saw.

[Suraj]

State Bank of India sees bad loan pressures easing

SBI Chairman Arundhati Bhattacharya, who has been taking steps to reduce its pile of sour debt, said loans to smaller companies remained a problem area but mid-sized and large companies' accounts were stabilising.

This is very good news indeed. An improvement in NPA ratio and better flow of credit is key to the industrial revival.

[nawabs]

Beyond the banks

http://www.business-standard.com/articl ... 750_1.html

Companies are increasingly turning to the bond and commercial paper markets to source debt at lower interest rates. Between April and July 2015, corporate bond placements increased by a whopping 215 per cent to Rs 1.69 lakh crore, compared to what was placed in the same period in 2014. Another Rs 1.66 lakh crore was raised via Commercial Paper (CP) in that four-month period. An estimated Rs 3.2 lakh crore of CP is currently outstanding. Most of that debt was raised at rates between 7.75 per cent and nine per cent - lower than the base rates of banks. Banks have been unable to service credit demand because their structural rigidities and weak balance sheets prevent them making deep rate cuts. The data make it apparent that there has indeed been some revival in commercial activity, and that there is genuine demand for credit at lower interest rates. The increased activity in CP and corporate bonds also helps to explain some of the dichotomy between high GDP growth projections and low bank credit. It is also clear that there is ample liquidity. Debt mutual funds and even banks have subscribed to these instruments.

The banking sector is suffering from a contraction in credit demand and an expansion in non-performing assets (NPAs). Between April and June 2015, bank credit growth hit a multi-year low of 9.2 per cent for the 29 banks which have declared results so far. Provisioning for NPAs led to a 10 per cent fall in profits. Most of the sticky loans were disbursed by public sector banks. The dodgy exposure lies in stalled infrastructure projects, and in loss-making power, construction, and steel companies. The Reserve Bank of India (RBI) has cut rates thrice in 2015, pulling the benchmark repurchase rate (or repo) down to 7.25 per cent. Bank base rates remain above nine per cent, however, because those cuts have not been fully transmitted. But the benchmark 10-year G-Sec is trading at 7.8 per cent. Companies with AAA-rating can place debt at small premiums over the benchmark rates; housing finance major HDFC recently placed a CP issue of three months tenure at 7.85 per cent.

Another factor is that bond issues have become easier in regulatory terms. The RBI has increased the exposure ceiling limits for single and group borrowers, and also for counter-parties, quite significantly. Bonds are efficient instruments when it comes to raising debt for long-gestation projects. Unlike in the case of vanilla long-term debt, there are few problems with asset-liability mismatches in long-tenure bonds of say 10-15 years or more. However, the current tenures are mostly at under five years. Unlike bonds, CP is unsecured against default. Most CP tenures are three months or less, indicating working capital is being raised by this route. Banks need to clean up balance sheets and reduce other expenses to price loans competitively. Until such time as that happens, India Inc will raise more debt by these alternative avenues. Economy watchers will also have to make allowances for the fact that bank credit can only provide a partial and perhaps, misleading view of economic activity under the current circumstances.

[Suraj]

POSCO, Shree Uttam to build 3MT steel plant in Maharashtra

India’s Shree Uttam Steel and Power Ltd., a subsidiary of the Uttam Galva Group, said it signed an agreement with South Korea’s biggest steelmaker Posco to build a steel plant in Maharashtra state.

Under the proposed joint venture, the two companies would set up the plant, producing 3 million metric tons a year, in the western Indian state in two phases, Shree Uttam said in a statement.

The company has land, rail and water resources in place for the project and hopes to start work on the site probably a year from now, Ankit Miglani, a non-executive director at another Uttam Galva Group company, Uttam Galva Steels Ltd., told Bloomberg TV India in an interview.

The proposed venture would help Posco’s expansion in India after a decade-long delay to its $12 billion investment in a steel, port and mine project in the eastern Indian state of Odisha. The steelmaker “tentatively postponed” the project, touted as India’s biggest foreign investment, due to the lack of an iron ore mine to feed the plant.

Coal auction 3.0 kickstarts with only non-power blocks

The third phase of auction started with two non-power blocks going under the hammer. Marki Mangli-I in Maharashtra and Bhaskarpara in Chhattisgarh were put for e-auction by the ministry of coal on the auction portal managed by MSTC mstcecommerce.com.

Mumbai-based Topworth Urja & Metals Limited won the Marki Mangli-I block for Rs 715 per tonne. This block did not find any takers during the last phase of auction. The mine has an extractable reserve of 8.35 million tonne and opened at a floor price of Rs 505 per tonne. The company will pay Maharashtra state government close to Rs 597 crore for a period of 30 years. The other bidders in the fray were Grace Industries Limited and Lloyds Metals & Energy Limited. The block earlier was allotted to BS Ispat before a Supreme Court judgement in August last year cancelled all coal block allocations.

Crest Steel & Power won the Bhaskarpara coal block for Rs 755 per tonne. The mine has an extractable reserve of 24.06 million tonne.

The company will pay Rs 1816.5 crore over 30 years to the Chhattisgarh state government. The bidding opened at a floor price of Rs 513 per tonne. The other bidders for this block were Jindal Steel & Power, Crest Steel & Power and Godawari Natural Resources. The mine earlier belonged to a joint venture (JV) company of UltraTech Cement and Electrotherm (India).

Buoyant indirect tax collections:
Indirect tax collections up 39% in April-July 2015

The Centre’s indirect tax collections grew 39.1 per cent, the fastest pace in three months, in July on robust pickup in excise duty mop-up, data released by the ministry of finance showed on Tuesday.

The rise was more on account of petroleum and diesel excise duty hike instead of a recovery on the manufacturing side and increase in the service tax rate to 14 per cent against 12.3 per cent from June.

The indirect tax collections rose to Rs 56,739 crore in July compared to Rs 40,802 a year ago. Besides, the indirect tax collection, which is a sum of revenue from service tax, excise duty and customs, posted a 37.6 per cent growth in the first four months of the current financial year to Rs 2.1 lakh crore. It is 32.6 per cent of the Budget Estimates (BE) for 2015-16.The central excise collections rose 65 per cent to Rs 22,273 crore in July over Rs 13,512 crore a year ago.

In the first four months of the financial year, the mop-up registered a 75.4 per cent increase to Rs 83,454 crore, which is 36.6 per cent of the full-year BE. The series of hikes in oil products gave the government additional sources of revenue, even as the manufacturing remains subdued on weak investments and domestic consumption.

[somnath]

This is very good news indeed. An improvement in NPA ratio and better flow of credit is key to the industrial revival.

The SBI results are actually confirmation of continuing stress in the economy - SBI is a proxy for the Indian economy, being ~20% of the banking system.

The topline looked better due to treasury income, but the core business showed what a big mess Corporate India continues to be in. Loan growth remains tepid, Gross (and net) NPAs were up QoQ. Above all, slippages (loans going "bad") went up QoQ, though there is a bit of a seasonality effect on this. Loan growth is slow not merely because there is less appetite to lend, but in effect there is less appetite (and capacity) to borrow.

As a stock, SBI looks good on valuations - it is a unique case in the PSU banking pack. But as a bellwether for the economy, the results display how royally "screwed" the economy still is.

It is down to Keynesian solutions - the govt needs to spend to kickstart the economy.

[vina]

It is down to Keynesian solutions - the govt needs to spend to kickstart the economy.

And kick it further into the Kakkoose that the Kangress and the NAC jokers dumped it into. What is needed is to remove the fiscal stress and the pressure on the central budget and lower the inflationary expectations . Inflation goes down, interest rate goes down. The key is to cut the flab. Close down all the dead ducks like HPF,Air India, BNSL, ITI,HMT, and put up a fire sale on whoever will buy em, take the infra and real estate and give it to whoever wants to put up industries. You need structural reforms NOW. Modi has done nothing of that. He has coasted along on the crash in commodity prices and cleaning up the clogged sewer of stalled projects. Has run out of steam and won't carry us much further.

This govt is just like the UPA with the economic decision making held hostage to election cycle. Okay, after Bihar elections, what, UP elections as the excuse to do nothing?

[somnath]

^^^Policy making (fiscal and monetary) need to counter-cyclical, not pro-cyclical. The issue with UPA was not that it spent public money, the issue first was the "quality" of the spend somewhat, and second, they didnt pull back into counter-cyclical posture once growth started again (in 2009).

Today, fiscal deficit isnt the biggest variable on rates, after all there is no private investment that is getting "crowded out". the biggest reason why rates arent lower are:

1. Stressed bank balance sheets. Doesnt allow banks to lower lending rates proportionately, as with a stagnant loan book it hits their bottomlines straightaway.

2. Overhang of the US Fed decision in Q4.

The govt needs to spend now to kickstart investment demand.

[Suraj]

This is very good news indeed. An improvement in NPA ratio and better flow of credit is key to the industrial revival.

The SBI results are actually confirmation of continuing stress in the economy - SBI is a proxy for the Indian economy, being ~20% of the banking system.

The topline looked better due to treasury income, but the core business showed what a big mess Corporate India continues to be in. Loan growth remains tepid, Gross (and net) NPAs were up QoQ. Above all, slippages (loans going "bad") went up QoQ, though there is a bit of a seasonality effect on this. Loan growth is slow not merely because there is less appetite to lend, but in effect there is less appetite (and capacity) to borrow.

On the other hand, nawabs' post just above suggests corporates are simply turning to the debt market for cheap funds, and are able to find significant liquidity through that route, fed by domestic debt funds and FPIs investing in local debt. Total outstanding commercial paper is listed as Rs.3.2 lakh crore, about 25% of the outstanding credit of SBI and its affiliates (Rs.14.xx lakh crore in Dec 2014 according to RBI data). Half of that CP was raised in the last four months. During that same period, corporate bond issues grew by 1.6 lakh crore. Corporates are simply turning to sources where they can get loans for ~50bp over benchmark rates, whereas banks are constrained to lend at higher rates because of the need to service their NPA load. Considering the appetite for debt at slightly lower rates, banks could do better by simply lowering rates to gain more business, though that doesn't take away the potential of future default from the new disbursals.

It is down to Keynesian solutions - the govt needs to spend to kickstart the economy.

Which is what it's doing now. GoI has a 4-5 year spending plan of approx Rs.30 lakh crore if you add up the totals from recent spending news articles, spread across energy, infrastructure, railways, defence and more.

[Suraj]

2. Overhang of the US Fed decision in Q4.

I'm skeptical they'll do anything now, particularly after the Chinese big bang devaluation act that reeks of mild panic in the middle kingdom. It doesn't affect the US directly to the extend that only ~10% of US exports go to PRC, but a strengthening dollar will hurt US competitiveness. Raising rates would just exacerbate this currency dynamic for them.

[somnath]

^^^CPs are <1 year instruments, and are competition to working capital lines given by banks. Expansion of the short term bond market is a function of the general street view on INR bonds, which is bullish. It isnt a reflection of enhanced investment demand - the only source of funding long term investment is banks (and assorted FIs). An anaemic growth in bank loan books is largely symptomatic of low appetite for investments.

On the GOI spending programme, we need to see how much of the spending announced by ministers is "incremental", ie, outside of committed project expenditures. In any case, 6 lac crores/annum, or ~ USD 100 billion is ~5% of GDP. To put it in context, we invest ~28-30% of GDP every year. If its incremental, it is a major Keynesian boost. I suspect a lot of it isnt. But we shall see.

[somnath]

2. Overhang of the US Fed decision in Q4.

I'm skeptical they'll do anything now, particularly after the Chinese big bang devaluation act that reeks of mild panic in the middle kingdom. It doesn't affect the US directly to the extend that only ~10% of US exports go to PRC, but a strengthening dollar will hurt US competitiveness. Raising rates would just exacerbate this currency dynamic for them.

US Fed isnt looking at keeping USD cheaper. The issue is of repairing the monetary balance sheets. The fear is that an extended period of low interest rates has fuelled increases in asset prices, and central banks hate extraordinary growth in asset prices (and inflation). If US data remains strong, the CNY deval isnt going to impact a Sep hike - at least thats what the market's saying, if you see the USD forward swaps.

[Suraj]

^^^CPs are <1 year instruments, and are competition to working capital lines given by banks. Expansion of the short term bond market is a function of the general street view on INR bonds, which is bullish. It isnt a reflection of enhanced investment demand - the only source of funding long term investment is banks (and assorted FIs). An anaemic growth in bank loan books is largely symptomatic of low appetite for investments.

Interesting. Do you have a source for data on the maturity breakdown of commercial bonds outstanding, as well those recently issued, to add to your response on CP data ? I don't find it too bad that the CPs are short term; with banks being in the situation they are, the rapid increase in CP issuance ensures liquidity for companies, even if they'll have to roll it over next year, hopefully into formal longer term bank loans by then.

On the GOI spending programme, we need to see how much of the spending announced by ministers is "incremental", ie, outside of committed project expenditures. In any case, 6 lac crores/annum, or ~ USD 100 billion is ~5% of GDP. To put it in context, we invest ~28-30% of GDP every year. If its incremental, it is a major Keynesian boost. I suspect a lot of it isnt. But we shall see.

At least the railway spending (~$130 billion) plan is much more than incremental. So is the spending on the 100GW solar initiative, which is a dramatic upscaling of the earlier target. Both of them entail efforts to find creative funding sources, ranging from private investment to foreign banking and investment sources to making deals with entities like LIC, in addition to government financial backing.

[somnath]

^^^The Indian corporate bond market is quite shallow - there is hardly any meaningful issuance above 3-5 years (barring some Tier II issuances by banks).

Best source of data on bonds in India is FIMMDA.

http://www.fimmda.org/index.aspx

On capex, we should look at numbers beyond announcements. The Railway Budget doesnt have any dramatic increase in investment plans. There can always be supplementary grants taken, but we shall see. Stuff like LIC funding etc are good soundbytes, but not so easy on the ground. LIC has a certain amount that they need to deploy every year, ~ 2 lac crores. They need to deploy it in a variety of instruments to ensure asset liability matching, projected returns etc. They are also the biggest effective underwriter of disinvestment programmes.

It is a good option, but first we need to see the numbers budgeted out.

[Suraj]

The railway thread is a good source of actual project progress. Financial updates may not be available except on an annual basis in the budget , though.

The Q1 GDP data will be reported at the end of this month. It should have interesting data on savings/GDP and GFCF figures, both on y-o-y and sequential basis.

[kmkraoind]

First good spell of Monsoon rain in Marathwada

A good spell at Telangana and North Karnataka will remove any drought chance.

[Varoon Shekhar]

I just read an article in Outlook, about a successful Indian e-commerce start-up, that only 25 million Indians have credit cards.

Is this accurate? If so, why such a small number for such a large economy, with so many consumers.

http://www.outlookindia.com/article/ind ... way/295031

As the internet becomes more pervasive and, let’s imagine...already, PayTM has 50 million wallet users, twice the number of users of their wallet as the entire credit card industry in India.

[Singha]

anywhere you can use a credit, debit cards are also accepted incl online. they should count the number of debit cards for a fairer est of how many indians can shop online + cash on delivery option is also there.

most middle class indians of older generation really are not comfortable with any form of credit or loaner and dont care for credit cards.

wrt mobile wallet, there are atleast 10 online wallet portals in india....found this out when ordering dominos pizza online....should have made a list and posted it here.

[Uttam]

I just read an article in Outlook, about a successful Indian e-commerce start-up, that only 25 million Indians have credit cards.

Is this accurate? If so, why such a small number for such a large economy, with so many consumers.

The low number of credit cards are for various reasons:
1) Credit cards are the least secured form of debt, i.e. lowest priority of payment in case the borrower is bankrupt. Lack of wide spread use of credit worthiness metrics like credit scores, made credit card more risky for lenders than other forms of instruments.

2) There is still a lot of black money that needs to be spent without getting attention from tax authorities. Credit card transactions are easy to track and people with black money know this. Therefore, even when they have credit cards, the rarely use them. The salaried class specially in the private sectors are most likely to use them and business class is least likely.

3) The merchants also discourage the use of credit cards. Their sales also get tracked and they cannot avoid taxes.

Having said that, the growth in salaried class, better enforcement of black money laws, implementation of GST, etc. will encourage the use of credit cards. India should consider giving incentives to merchant (may be zero transaction fees) on RuPay network because the other benefits will far outweigh the loss in revenue due zero transaction fees. There is no reason to let Visa and Mastercard corner the market.

[srin]

Zero transaction fees for Rupay is a very good idea. Local merchants around my area bill me on MRP (means no discounts) if I pay by card. Their complaint is that they have to pay transaction fees.

[chaitanya]

Don't know if this has been posted, but:

Industrial output grows at 4-month high of 3.8% in June

Regarding the NPAs, IIRC power distribution companies are currently the ones saddled with losses and massive NPAs (i think this was mentioned earlier here). Earlier it was power generators - it seems like effective policies (coal auction, etc) allowed those projects to move ahead. Can something similar (policy related) be done with the discoms?