Re-monetising India PDF Print E-mail
Saturday, 31 December 2016 00:00
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Pace of recovery depends on absence of negative surprises that affect consumption, the only growth-driver


Demonetisation will mean higher Tax-to-GDP as less-cash picks up. But with slowing GDP, oil prices & NPAs rising and FIIs exiting on stronger US, the macros don’t look as bright. Etail and PE boom slows. So jump in govt-spend critical



At one point, with no separate Railway Budget and GST on the anvil, this looked like India’s breakaway year. The likelihood of a fare-setting regulator suggested less subsidies while GST meant more buoyant taxes and the elimination of the infamous border check-posts.


The government had already made impressive moves on cutting petroleum subsidies and good progress on direct Aadhaar-based transfers, it had realized the error of its ways and raised natural gas prices, even auctioned a lot more telecom spectrum while liberalizing restrictive holding limits. Labour reforms, partially introduced via a special package for big job-generating sectors like readymade garments, implied more cutting of labour cholesterol was on the agenda, and a glimpse was seen through the changes in the Apprentice Act; another big job-generator, the roads sector, got relief with an automatic-release mechanism for a portion of disputed payments. An involvency law raised hopes of decades of insolvent capital being released … there was a lot more, though to balance it, there were seriously bad moves like controlling prices of patented seeds, even trying to abrogate patent rights – the saving grace, though, that it was generally one step backward for every two steps forward, though the big moves on privatization and banking reform were put on the back-burner.


Coming up trumps, almost …


Even in a year of Donald Trump, stronger oil and the obvious impact of a stronger dollar on FII inflows, India looked in a happy place. FII outflows were an obvious concern, but with a current account deficit of around 1% of GDP, India could weather the storm, especially with the build-up of forex reserves and the sustained increase in FDI flows. Sure, the Tata-Mistry row roiled India Inc and showed up just how shallow the move towards professionalization – with greater power to independent directors – was, something reinforced by the sordid tale of favouritism in India’s biggest stock exchange.


With the freebie-led etail boom slowing dramatically – Amazon’s revenue growth fell from 492% in 2015 to 127% in 2016 and Flipkart’s from 397% to 148% – and the halving of PE funding, the dream of a new-economy-led jobs boom looks less realizable. The debt position in Indian banks continued to worsen – while gross NPAs plus restructured loans rose from 6.8% of all loans in FY11 to 11.5% in FY16 and 12.4% in Q2FY17, Credit Suisse reckons this is nearer 16.5% once the unrecognized stressed loans are taken into account. In the steel sector, despite the minimum import price regime, the share of debt with stressed firms rose from 53% to 61% between Q1FY17 and Q2FY17. Despite the relief provided under UDAY, collapse in demand means 63% of all power sector debt is with companies that have an interest cover (IC) of less than one – in telecom, even while the RJio impact is not over, 52% of debt is held by firms with an interest cover of less than one. The good news in all of this, though, is the sharp jump in government investments in sectors like road and railways.


And then came demonetisation


Given the fragile recovery was essentially driven by consumer demand, apart from the problems faced by the common man, the hit to the economy is obvious – Kotak Securities has marked down FY17 GVA from 7.7% to 6.4%. How long this will last is not clear since no one knows how long it takes to restart a supply chain – the disruption can be as large as 4-6 quarters in sectors like real estate and jewellery.


The flipside is the huge popular response with people of the view this is the first serious effort to get at black money. RBI data shows a surge in the use of mobile wallets and a stagnation in transfers like those through RTGS, the latter perhaps signaling the slowing of the broader economy. India’s infrastructure constraints, like just a fourth of the population with internet facilities, are well-known; what was heartening was the technological response, from simplifying digital pay for those with feature phones to Aadhaar-pay for those without phones. As the economy gets a little more formal, an immediate bump-up in tax collections is likely.


Any more negative suprises?


How 2017 will pan out will depend upon how fast consumer demand comes back and whether broken supply chains can be switched back on quickly. The sharply lower Q3/Q4 and the cut in India Inc’s earnings – from Rs 628 in September 2015, Kotak lowered its Nifty50 EPS to Rs 525 in December 2016 – ironically, will give a natural boost next year. With capacity utilization levels still at around 75%, chances of a capex recovery are poor. Kick-starting the economy then depends on how fast the government can ramp up spending – compared to 20.9% in FY16, capital expenditure by government was to rise a mere 3.9% in FY17. Given the urgent recapitalisation needs of banks, how much this can be ramped up depends upon the demonetization dividend by way of extra taxes and special dividends from RBI, and whether this is frittered away in populist spending. Of course, if there are more negative surprises, such as unleashing an unintended raid-raj from moves like those on benami property, and these further hit private consumption, all bets may be off.


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