Economic Highlights

New Delhi, 15 February 2016

Cheap Deposits A Bane

POLICY SHIFT VITAL

By Shivaji Sarkar

The economy is on a roll. Stocks are crashing, the Rupee has touched a critical level, infrastructure projects are robbing bank deposits and banks are writing off large loans and reducing interest rates. Naturally, this is hitting the common man. Everyone plays with his hard earned money.

Notably, stocks have been tumbling before the New Year, whereby on 11 December alone it tumbled 807 points and touched a low of 22,951 points. A major reason for this is the State Bank of India’s poor performance as profits dipped by 62 per cent due to rising NPAs (Non Performing Assets) and writing off of loans. Resulting, in SBI’s profit falling to Rs 1115 crores from Rs 2910 crores a year ago.

Another reason for stocks crashing is the firming of the US economy, perhaps a rise in interest rates and almost $ 2 billion or Rs 14,000 crores sold by foreign institutional investors (FII) since January. This trend has hit mutual funds hard as they deal with the aam aadmi’s money additionally, average investors too will get less returns.

It also hits the National Pension Scheme (NPS) where Government employees’ savings are parked. Exposure of employees’ money to the stock market is a dangerous risk not only to the employees but also to the Government as it is the guarantor. Consequently, all other pension funds have also been affected for similar reasons. Thus, a subscriber to such funds needs to be cautious.

Undeniably, RBI Governor Raghuram Rajan has made the correct noise. He wants deeps surgery of the banking sector to free it of the lump of bad loans.

Pertinently, one needs to understand that public sector banks have taken the burden of financing infrastructure. If PSU banks had not financed infrastructure, growth in the Indian economy would not have taken place. The SBI and Punjab National Bank are stated to have the highest exposure to infra finance and Syndicate and HDFC the lowest.

According to RBI figures, stressed loans of the infrastructure sector increased to 24 per cent of total advances by June 2015, from 22.9 per cent till June 2014. Over the past ten years, bank lending to this sector grew at the rate of 28 per cent, higher than the overall credit growth. And, infrastructure’s share of bank credit doubled from 7.5 per cent in 2005 to 15 per cent in 2015.

Bluntly, over Rs 2 lakh crores of loans are stressed out of the total infrastructure exposure of Rs 8.4 lakh crores. The RBI notes that some of the loans extended by banks in the last few years have already become bad assets. “Big corporate infrastructure players have taken too much debt”, says Rajan.

Importantly, the reason is not economic slowdown. According to PSU banks, several promoters who pushed for big loans during the last ten years not only overestimated their demand-supply position. Worse, they inflated project costs and many diverted funds. The banks too faltered due to their appraisal systems being inadequate. The less said the better of some bankers being in league with the swindlers.

Today, this is taking a heavy toll on banks, the economy and the poor man’s deposits. It is hitting everyone hard and might even hit the budgetary process.

A Crisil study states India needs Rs 6 lakh crores of investments every year till March 2020. In short, Rs 30 lakh crores is need in about five years to provide power, improve roads, telecom, transport and other urban infrastructure.

Questionably, is the country stretching it a bit too far? Will growth and production rise at a rate of 5 per cent, which is not a high figure? Alas, this is not happening as demands are constricted and high consumer inflation prevents people from making purchases.

Think. Almost 70 per cent families do not have any spare money as their average income is between Rs 4,000-Rs 7,000 a month. Yes, low purchasing power is a bane. The targets in comparison to this are too ambitious and inflated.

Undoubtedly, this calls for systematic planning. The Niti Aayog needs to research, find the fault-lines and correct the path. Is that happening?

Add to this, the global economic scenario too is unsupportive. The IMF has taken note of the slowdown. True, India is a comparative brighter spot but slippery global markets have hit the country’s exports forcing exporters to cut production at many levels.

Besides, global stocks too have been on sliding with most Asian indices losing considerable ground on 11 February. Hong Kong closed 3.8 per cent lower and major European indices fell sharply over oil price concerns and after the US Federal Reserve Chief Janet Yellen raised concerns about the global economy.

The continuous fall in risky assets across the globe, the trend in liquidity moving towards safe haven assets like bonds and gold are also expanding the negative implications on the Indian market. The turmoil in the domestic market also highlights the possibility of margin pressure, which might continue to disturb the market.

Moreover, oil slid further indicating an additional slowing world economy. Brent crude was at $ 30.53 and US West Texas Intermediate (WTI) at $ 26.76, close to its lowest since 2003. However, this trend should become the norm as the world is taking to renewable energy in a big way.

As a result, in this mayhem everybody is ignoring the Rupee which plummeted to Rs 68.30 to a US dollar as American currency demands for foreign capital outflows --- more FII outgoes ---- increased. This is a warning for those who say that falling Rupee would boost exports. It might or might not but it makes inflation a reality. The benefit of low oil prices is also lost for Indians as the US dollar becomes expensive.

Again, the Niti Aayog has to do deeper studies. The Rupee cannot remain anaemic for long as a weak Indian currency has severe repercussions. To be a global player India has not only to export but also be a robust consumer. The Aayog needs to get deeper into the problems and suggest solutions so that the Indian market emerges out of the woods.

Alongside, it also has to give the road map for a stronger Rupee in the next two years not only for a stable market but also for a steady polity.

Clearly, India has to look out for the safety of the poor man’s savings which has fueled growth since Independence, decide on high deposit and lending rates so that nobody  can inflates demand and divert funds. The country needs a shift in its policy else the economy and market would remain in turmoil. ----- INFA

(Copyright, India News and Feature Alliance)