GDP to grow at 5.5% in FY21 but downside risks persist
Expecting a marginal improvement over the gross domestic product (GDP) growth of 5 per cent estimated by National Statistical Office for FY20, India Ratings and Research estimates GDP to grow at 5.5 per cent year-on-year in fiscal year 2020-21, however, the downside risks persist. The slowdown, in the agency's view, is a combination of several factors including an abrupt and significant fall in lending by non-banking financial companies, reduced income growth of households coupled with a fall in savings and higher leverage, and inability of the dispute resolution or judicial systems to quickly unlock the stuck capital.
Although some improvement in FY21 is expected, these risks are going to persist. As a result, the Indian economy is stuck in a phase of low consumption as well as low investment demand. Ind-Ra believes a strong policy push coupled with some heavy-lifting (even if this requires using the escape clause as suggested by the FRBM Review Committee headed by N K Singh) by the government is required to revive the domestic demand cycle and catapult the economy back into a high growth phase.
The government has announced a slew of measures recently to prop-up the economy, but Ind-Ra believes they will come to aid only in the medium term. Therefore, all eyes are on the forthcoming union budget, to be presented on February 1, 2020. It expects the shortfall in the tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6 per cent of GDP (budgeted 3.3 per cent) in FY20, even after accounting for the surplus transferred by the RBI. A continuance of low GDP growth even in FY21 means subdued tax revenue and limited room for stepping-up expenditure. "The government will have to construct the FY21 budget in a way that expenditure is rationalised and prioritised and all avenues of revenue generation are tapped. While rationalising, the focus of expenditure has to be on creating direct employment and putting more money in the pockets of the people at the bottom of the pyramid," the agency added.
Gross fixed capital formation (GFCF) has become government dependent, as incremental private capex has been down and out. Despite the fiscal constraints, the government has not shied away from infrastructure spending in the past and even resorted to fund them through extra budgetary resources. Ind-Ra, therefore, believes the government will continue to focus on infrastructure spending and leverage all possible options - budget, off budget including National Infrastructure Investment Fund. Also, since a larger part of the government capex now takes place at the state government level, it will be important to keep a tab on the state government capex as well.
Notably, the higher award recommended by the 14th Finance Commission to the states was mostly spent on capex. Ind-Ra thus expects GFCF and government final consumption expenditure to grow at 5.3 per cent and 9 per cent, respectively, in FY21 (FY20: 1.0 per cent and 10.5 per cent). Further, it expects private final consumption expenditure (PFCE) to grow at 6 per cent in FY21. The key support to PFCE could come from rural demand, which may see an uptick due to a higher rabi output.
Food and crude oil prices are the key drivers of inflation in India. Though oil prices are stable, retail food inflation after remaining subdued and in single digit for 70 months since January 2014, entered into double digits in November 2019 and accelerated to 14.12 per cent in December 2019. This means, in the near term, further monetary easing is ruled out and we may have to brace for an extended pause on the policy rate, it added. However, the minor improvement in FY21 fiscal deficit from FY20's coupled with moderate inflation may keep 10-year G-sec rate in the 6.8-6.9 per cent range by end-March 2021.
Ind-Ra expects external environment to improve somewhat in FY21. This is likely to help India's exports of goods and services to grow by 7.2 per cent and the current account deficit to decline marginally to $32.7 billion, 1.1 per cent of GDP in FY21
Budget 2020: Economic reforms, infrastructure spending key to India's $5 trillion economy target
With inflation-adjusted GDP growth pegged at 5% and global geopolitical headwinds weighing considerable downside risks on export trade earnings, the Indian economy is in a slowdown mode. Sagging consumer demand and falling private sector investment coupled with deceleration across core industry verticals have added to the gloomy sentiment.
Bolstering domestic spending, tackling inflationary pressures and boosting investor confidence to revive the economy will be the key challenge areas before Finance Minister Nirmala Sitharaman as she presents her second budget on February 1.
Addressing cyclical measures in the form of favourable monetary and fiscal policy rates may provide a short term push to the economy. However, strong structural changes are pivotal to directing the economy on a sustained growth trajectory and achieving inclusive economic development.
The budget must place priority focus on enhancing the competitiveness of the Indian manufacturing sector and expanding its potential to generate large-scale jobs for the country's workforce. The onus must be on increasing the share of the manufacturing sector to 25% of GDP from the current 16% and accelerating the integration of India with global value chains.
The emphasis will need to be on leveraging crucial infrastructure linkages for speeding industrial development and create productive employment. The government will need to roll out suitable policy reforms to facilitate the expansion of manufacturing units to tier-II and tier-III cities in the country to uncork the untapped demand potential of these regions. Local economies can be spurred leading to the creation of jobs and business opportunities.
The trade war between the US and China has left some scars and could prove to be a windfall for India. Companies from both countries will seek to relocate to overseas destinations for setting up export bases.
India could emerge as a favourable port of call for the companies to hedge their businesses in the face of global trade volatilities. This is an opportunity India cannot miss and should take full advantage of the situation.
India could open up new supply lines to both the US and China and expand its global trade and business footprint. The government should provide trade concessions and ease FDI norms considerably to facilitate big-ticket companies from both countries to set up huge assembly lines and production bases in India in a hassle-free manner.
India will also need to create an investor-friendly trade regime which will invigorate the investment climate in the country, spur momentum in the manufacturing sector and signal the transition from expenditure-led economic growth to demand-led economic growth. The government should also take steps to further enhance the ease of doing business to optimise the competencies of Indian companies.
Creating an investor-friendly regulatory environment, ensuring single-window clearances for businesses and removing tax roadblocks can go a long way in easing business sentiment in the country.
The unveiling of the National Infrastructure Pipeline (NIP) reiterates the government's commitment to steer the infrastructure sector on a higher growth curve through increased capex. The mechanism should not become another policy document but prove instrumental to help get mega infrastructure projects off the ground and ensuring that there are no time and cost overruns in their execution through easy assessment and approval of sanction processes.
Private players and government agencies need to synergise their capabilities in a coordinated manner to ensure optimum utilisation of assets and resources and avoid overcapacities, leading to a cycle of non-performing assets. Long-pending projects like the Dedicated Freight Corridor (DFC) already running behind schedule should not be delayed inordinately and be executed in accordance with specified timelines.
The national logistics policy (NLP) should be implemented without any further delay. Through the creation of a digital portal linking different stakeholders, the NLP will facilitate cooperation and synergy rather than unhealthy competition among players. Boosting supply chain efficiencies, the NLP can position India as a prominent global logistics player.
Steadfastly treading the path of economic reforms, implementing investor-friendly policy interventions and ensuring speedy implementation of infrastructure projects is key to realising India's vision of becoming a $5 trillion economy by 2024.
Budget 2020: Govt needs to strengthen ARCs; provide stimulus to the voiceless sector
Asset Reconstruction Companies (ARCs) have been institutionalised through central legislation, securitisation and reconstruction of financial assets and enforcement of security interest (SARFAESI Act 2002). They need a licence to operate and are regulated by the Reserve Bank of India. In 17 years since passing the legislation, only 29 ARCs got registered.
Function- They acquire Non-Performing or Stressed Assets from a Bank and resolve it through various measures, including restructuring/settlement Asset Sale.
How they can add value to the Ecosystem
1. Debt Aggregation:
In the Indian Context, all large loans are granted by a consortium of lenders ( or where multiple lenders are involved). For any resolution measures, a level of threshold consent (60% or 75% etc) is required for security enforcement or restructuring. Here ARCs can add value by acquiring and aggregating loans from different banks so that inter-creditor issues do not hinder timely resolution.
For example, RBI in June 2019 had issued an exhaustive and comprehensive resolution framework for distressed assets which is supposed to be followed by the banks. There is a one-month review period from loan default and six months' time thereafter for the implementation of a resolution plan.
As per RBI's own report in December 2019, in 6 months' time, only 1 case has been resolved with 2% value under this resolution framework in a survey done by the RBI. In one-third cases by value, banks have been able to sign just an Inter-Creditor Agreement, which is the first step towards the resolution process.
If banks sell such assets to ARCs, debt consolidation at a single point will help faster resolution.
2. Securitisation and Loan Trading for Liquidity
Currently, an ARC is the only entity which is authorised to securitise NPAs and issue Security Receipt (SR) under the SARFAESI Act. This makes ARCs stand apart with unique empowerment and authorisation. SR is a kind of a Pass-Through Certificate, with rights over underlying securities. These are rated half-yearly and can be traded.
During last year, Foreign Institutional Investors (FII/ FPI) and distressed funds started entering into the SR market in a big way. As per the RBI report released recently, their investment grew by more than 400% during FY19 from Rs 4,200 crore in June 2018 to Rs17,200 crore in June 2019.
ARC as an issuer of this unique instrument can play a role in bringing depth and liquidity to the secondary loan market. For this SR transactions need to be incentivised.
3. Resolution Skill Sets and Expertise
Being in the business for the last 17 years, ARCs have matured enough and bring specialisation and expertise on the table. NPA management is the only business with ARCs, and in the process, they have developed core competencies in recovery/resolution.
As per the RBI report, ARCs have acquired a book debt of Rs 4 trillion so far and have gained hands-on experience in value maximisation from asset sales under difficult situations.
Services of ARCs may be utilised in more ways, like say recovery in large complex cases at the apex courts/SEBI etc. Scope of ARC activities to be enlarged.
4. Pre-pack IBC Package / Liquidation as going concern
Now, there is an established comprehensive resolution framework under the Bankruptcy Code. However, so far, 4 out of 5 cases have been headed for liquidation. The latest data from IBBI reports resolution of 156 cases and 587 liquidations. In the liquidation cases, the realisable value is only 4%, with a liquidation value of only Rs 0.16 lakh crore against claims of Rs 3.55 lakh crore.
ARC as an institutional framework has the potential to play a supplementary and complementary role in adding value either in bringing a pre-pack resolution or sale of assets as a going concern before it is moved to liquidation.
So, what do ARCs expect to function optimally
Last year, the cash component of the acquisition transactions of ARCs from banks moved up to 78% from 31% (rest being SRs), and the move is towards 100% cash. In this scenario, the role of an ARC is changing from an investor to a fund manager.
The present requirement of 15% investment by ARCs themselves which was not in the SARFAESI Act and was added in 2014, maybe dispensed with. Besides, it will align with the government's FIPB Guidelines of 2016, permitting 100% investment by FPIs in SRs issued by ARCs (so no investment by ARC is required, as per the government's Guidelines).
In the acquisition of NPAs from banks, where they get 100% full cash exit, no investment by ARC needs to be mandated.
2. Role Play under IBC
SARFAESI allows ARCs to acquire debt only. While the IBC is broad-based with change in equity, management and debts. For effective resolution, both the cylinders - debt and equity have to work together. While IBC permits ARCs to play the role of resolution applicant and gives certain exemptions, in view of the current regulations ARCs cannot take a stake in the equity of a stressed company directly, which is almost a prerequisite in many IBC cases.
ARCs may be freely permitted to take an equity stake in companies within the IBC resolution framework.
3. Loan Product for ARCs
In a paper 'Framework for revitalising Distressed Assets in the Economy' in January 2014, RBI had suggested allowing banks to extend finance to 'specialised' entities put together for the acquisition of troubled companies. The lenders should, however, ensure that these entities are adequately capitalised. Subsequently, in 2017, the net worth of ARCs was enhanced by the RBI from Rs 2 crore to Rs 100 crore. They are generally well-capitalised now.
A Standardised loan product may be devised for ARCs, to finance acquisition and resolution of stressed assets based on a revival plan approved by the creditors.
In 2011, the government had constituted a key advisory group on the ARC Sector reforms with all stakeholders like regulators, banks, law firms, industry bodies, rating agencies etc. The committee had recommended the task force to continue as a standing committee.
A standing committee on the ARC sector should be formed which should meet quarterly to take stock of the developments and ways to improve the functional effectiveness of ARCs.
Budget 2020: Govt likely to raise LTCG tax holding period to two years
The Modi government is considering raising holding period for imposition of tax on long-term capital gains (LTCG) by one year in the upcoming Union Budget on February 1. LTCG tax was introduced in Union Budget 2018-2019. The government had estimated imposition of this tax would bring marginal revenue gain of about Rs 20,000 crore in the first year. Investors had sought LTCG tax relief from the government in last year's Budget too.
In September last year, PM Narendra Modi had promised foreign investors that the government was working towards "bringing tax on equity investments in line with global standards". The government may change the definition of 'long term' from a year to two years, according to a report in The Economic Times.
This is likely to attract more foreign investors. Currently, long-term means a holding period of more than one year from the date of purchase of securities. Anyone selling listed equity shares after holding them for one year has to pay 10% LTCG tax on the profit earned over Rs 1 lakh in an year.
Short-term capital gains or profit from sale of equities within a holding period of one year are taxed at a rate of 15%. The ET report says government is consulting tax advisors and experts on the possible effects of removing tax on long-term capital gains (LTCG). The government is also evaluating various options to attract more long-term investment from foreign investors.
Bank strike on January 31, February 1 over demands of wage hike
Bank unions have called for a two-day nationwide strike starting January 31 after talks with the Indian Banks' Association (IBA) over wage revision failed to bear results.
The United Forum of Bank Unions (UFBU), which represents nine trade unions, said they will also hold a three-day strike from March 11-13. UFBU is seeking at least a 15-per cent hike, but the IBA has capped the raise at 12.25 per cent, UFBU state convenor Siddartha Khan said.
"From April 1, we have decided to go on an indefinite strike," Khan said.
The last wage revision meeting was held on January 13.