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India said it may sell a stake in a state company next month as the government tries to raise 300 billion rupees ($5.4 billion) to help narrow the widest fiscal deficit among the biggest emerging markets.
“I am hopeful that I should be able to do something in September,” Disinvestment Secretary Mohammad Haleem Khan told reporters in New Delhi today. “Meeting the disinvestment target should not be a problem because we have enough in the pipeline and my team is working on other cases.”
Share sales are part of the government’s plan to pare the budget gap to 5.1 percent of gross domestic product in the year ending March 2013. India’s struggle to limit the deficit as slowing growth crimps tax revenues and subsidies spur spending has led Standard & Poor’s and Fitch Ratings to warn they may strip the nation of its investment-grade credit rating.
India plans to sell stakes in 15 companies, including about 10 percent in Steel Authority of India Ltd., the nation’s second-biggest producer, Thomas Mathew, joint secretary for capital markets in the finance ministry, said on June 18.
Prime Minister Manmohan Singh’s government projects record borrowing of 5.69 trillion rupees this fiscal year even as it strives to narrow the budget gap from 5.8 percent in the 12 months ended March. Last year, India raised about one-third of its 400 billion-rupee asset sale target, according to data compiled by Bloomberg News.
The budget shortfall is the widest among the so-called BRIC nations, which also include Brazil, Russia and China.
India will find it difficult to stay with its plan of 9 percent annual GDP growth from 2012 to 2017, Finance Minister Palaniappan Chidambaram said separately in parliament in New Delhi today. First-quarter growth slowed to a nine-year low of 5.3 percent.
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A farmer removes dried-up rice plants in his field in Zap village, about 56 km west of Ahmedabad, July
A summer drought makes a bad situation worse for an Indian economy already crippled by a sharp slowdown in growth, persistent inflation and a politically hamstrung government.
Late on Thursday, New Delhi confirmed the first drought in three years as monsoon rains are likely to be less than 90 percent of the long-term average, dealing a blow to Asia’s third-largest economy, where more than half the farmland lacks irrigation.
“We already have a scenario in which growth is going down and inflation is going up, so it’s going to worsen this further,” said D.K. Joshi, principal economist at ratings agency Crisil.
Weak rains in the four-month monsoon that started in June will drive up food prices and erode spending power in a country where more than half the population relies on the rural economy, crimping demand for goods from tractors and motorbikes to soap.
The economy grew at 5.3 percent in the March quarter, its slowest in 9 years, but headline inflation above 7 percent has prevented the central bank from cutting interest rates at its last two policy reviews. This increases pressure on the government of Prime Minister Manmohan Singh to take steps that will revive investment.
Just over halfway through the season, rains are 20 percent below normal, and the weather office forecast that the El Nino weather pattern should reduce rains again in the second half.
The states of Haryana and Rajasthan in the north, Gujarat and Maharashtra in the west, and Karnataka in south India are hardest hit.
The last drought, in 2009, saw rains that were 23 percent below normal and pushed up food prices that in turn sent headline inflation into double digits and triggered a series of 13 interest rate increases between March 2010 and October 2011.
Besides growth, drought also threatens to add to India’s already-high current account and fiscal deficits.
The government has set a target of cutting its fiscal deficit to 5.1 percent of GDP this fiscal year, from 5.76 percent, but this is now looking over-optimistic. Nomura expects a fiscal deficit of 5.8 percent of GDP.
“Typically what we see in a drought year is that the imports go up, for instance pulses, sugar, edible oil, and exports of a lot of agri-products go down, so current account is negatively impacted,” said Sonal Varma, an economist at Nomura in Mumbai.
Relief measures will add to a fiscal deficit that is already stressed by a politically constrained government’s inability to raise the price of budget-busting subsidised diesel.
“Government will focus on drought relief measures – more subsidies on pulses and sugar, more employment under the NREGA programme,” Varma said, referring to the government’s flagship rural jobs scheme.
ASSET QUALITY
The drought also imperils asset quality for banks, with State Bank of India (SBI.NS_0″>SBI.NS) and Punjab National Bank (PNBK.NS), the two biggest state lenders, most exposed if the central bank allows crop loan payments to be rescheduled in the worst-hit states, said Manish Ostwal, banking analyst at KR Choksey.
“Definitely some impact on asset quality of farm loans will be felt, especially in the states where the drought is more pronounced,” said P.K. Anand, executive director at state-run Punjab and Sind Bank (PUNA.NS).
Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, told Reuters this week that the government may have to spend more in rural areas to shore up incomes if the rainfall remained deficient.
“The real danger with a drought is not just the impact on GDP growth, but that it is the incomes of the poorer sections that get hurt. That’s why MGNREGA is important,” said Ahluwalia, adding a drought could shave half a percentage point from GDP.
MGNREGA, the Mahatma Gandhi National Rural Employment Guarantee Act and sometimes just called NREGA, is one of the ruling Congress party’s signature policy measures.
A bad monsoon is not as damaging to the Indian economy as it once was, with farming’s share of total output now at 14 percent, down from about 24 percent a decade ago. About three-quarters of India’s rain falls during the summer monsoon.
Still, India is one of the world’s biggest food producers and consumers. More than half the Indian workforce is employed in agriculture, and rising rural incomes in recent years have been a key driver of domestic demand.
“We are faced with some very challenging times up ahead of us,” said A. Mahendran, managing director of Godrej Consumer Products Ltd (GOCP.NS), India’s largest home-grown maker of personal care goods such as soaps and shampoos.
Earlier this week the Reserve Bank of India cut its growth forecast for the fiscal year that ends in March to 6.5 percent from the 7.3 percent target set in April, and lifted its wholesale price index inflation expectation to 7 percent for March, from its earlier 6.5 percent target.
Yes Bank estimates that a 10 percent shortfall in monsoon rains could push up headline inflation by about 40 basis points.
Nomura expects growth to fall to 5.8 percent this fiscal year, and expects food inflation to exceed 15 percent in coming months, from 10.5 percent now, and does not expect another rate cut in 2012.
Mahindra & Mahindra (MAHM.NS), the world’s largest tractor maker, recently cut its tractor sales growth estimates for the current fiscal year to 5 to 6 percent from 10 to 12 pct. Sales from April through July rose just 1 percent.
“Always, a lower monsoon will have an impact in terms of planting and so on, and that drives the demand cycle for tractors,” said Executive
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FRANKFURT — When European Central Bank head Mario Draghi said that he was ready to “do whatever it takes” to save the euro, he fueled investor hopes the bank would again start buying government bonds to lower borrowing costs for struggling countries.
Just one problem: the ECB has tried bond-buying before. And it didn’t work very well — the action was seen as too hesitant and fell short of decisively lowering borrowing costs for stricken Spain and Italy.
Draghi is certain to face questions Thursday at his news conference after the bank’s government council meets about possible bond purchases and the financial turmoil in Europe.
Last week, Draghi noted that excessive government bond interest rates “come within our mandate” if they are hindering the ECB’s efforts to spread its single interest rate policy throughout the 17 countries that use the euro. That was seized on as a hint the bank might restart its Securities Market Program that bought bonds in the open market, but which has been left dormant since March.
Bond purchases drive their prices up and their interest rates, or yields, down — price and yield move in opposite directions. The ECB’s earlier purchases were able to temporarily drive down the yields — and therefore the borrowing costs incurred by Spain and Italy when they floated new bonds.
Analysts say that Draghi has raised expectations for action so high that markets could be sorely disappointed if no new bold measures are announced Thursday. An interest rate cut from the current record low of 0.75 percent remains a possibility, though many analysts think the bank will wait at least until September. Market attention is most intensely focused on what Draghi will say about the bank’s willingness to influence the market for government bonds.
Slavena Nazarova, an economist at Credit Agricole expects Draghi to emphasize the bank’s willingess to use all its weapons to support the eurozone — but take no new actions: “We are skeptical that such intervention will come as soon as this week, so there is quite a big risk of disappointment for the markets.”
The U.S. Federal Reserve may also leave investors a bit crestfallen, as it considers Wednesday and Thursday whether to do more to stimulate the uncertain economic recovery in the United States. Analysts say it likely will not move to buy more government bonds and stimulate the economy by expanding the supply of money in the economy.
For the ECB, simply re-starting the SMP remains problematic. The bank first used the program in May, 2010 as Greece headed for a bailout, then paused it. It was re-started in August, 2011 as the crisis spread from small countries such as Greece, Ireland and Portugal to countries whose governments are too big to easily bail out — such as Spain and Italy.
But after an initial dip in yields, Spain and Italy soon saw them rise again. The problem was that ECB said the program had to be limited — a statement that kept it from overly impressing the bond market.
On top of this, there was opposition from the Bundesbank, Germany’s central bank and a high-profile member of the ECB’s board. The Bundesbank remains skeptical of bond purchases, saying they come too close to breaking the ECB’s founding treaty, which forbids it from financing
India, the second-biggest grower of rice, wheat and sugar, will review its export rules and consider curbing the amount of food crops that traders can stockpile as the worst monsoon in three years fuels a rally in prices.
“I am concerned about the deficient rain,” Food Minister K.V. Thomas told reporters after a meeting with Prime Minister Manmohan Singh yesterday. “We will get a clear picture about the situation after 15 days.”
Rice planting dropped 19 percent to 9.68 million hectares (24 million acres) this year from 12.04 million hectares a year earlier, the farm ministry said July 13. Photographer: Prashanth Vishwanathan/Bloomberg
July 17 Tom Flora, a farmer from Delphi, Indiana, Mike Zuzolo, president of Global Commodity Analytics in Lafayette, Indiana, and Wes Stockdale, a farmer from Veedersburg, Indiana, talk with Bloomberg’s Tony C. Dreibus about the impact of the U.S. drought on Midwestern corn crops and agriculture-related business. The condition of the U.S. corn crop worsened for a sixth straight week, the longest such streak since 2003, as the worst Midwest drought in a generation spread, the Department of Agriculture said yesterday. (Source: Bloomberg)
Dry weather from the U.S. to Australia has parched fields, pushing up global corn and wheat prices and curbing a decline in food costs. El Nino weather conditions, which can parch Asia and bring cooler weather to the U.S., may develop during July to September, the World Meteorological Organization said June 26. India extended a ban on exports of sugar, rice and wheat in 2009, following the weakest monsoon since 1972.
“One of the big concerns about a repeat of the food crisis is whether we are likely to see the export policy in key producing and exporting countries changing,” Sudakshina Unnikrishnan, an analyst at Barclays Plc in London, said by phone. “An underperforming Indian monsoon does raise concern that potentially there could be some sort of export curbs.”
More than 235 million farmers depend on the monsoon for crops such as rice, peanuts, soybeans and cotton. Sowing of monsoon crops begins in June and harvesting starts in October.
Consumer-price inflation exceeded 10 percent in June to remain the fastest among major economies. The consumer-price index climbed 10.02 percent from a year earlier, compared with 10.36 percent in May, the Statistics Ministry said. Singh is banking on higher farm output, which accounts for about 15 percent of gross domestic product, to curb food prices.
Miss Forecast
The monsoon, which represents more than 70 percent of annual rainfall, was 22 percent less than the 50-year average over June 1 to July 18, delaying sowing of corn and rice crops. Weather in July, the wettest month in the June-September rainy season, may miss a forecast of normal rain, L.S. Rathore, director general of the India Meteorological Department, said in an interview on July 16.
India, also the world’s biggest sugar and palm oil consumer, is studying the option of imposing a stockholding limit on food crops, Thomas said yesterday.
“With the monsoon playing hide and seek, it is a challenge for our farmers and scientists to maintain the food-grain output achieved in the last two years,” Farm Minister Sharad Pawar said July 16 in New Delhi. The country won’t ban exports of rice and wheat as it has ample stockpiles, he said.
Rice Planting
Soybeans on the National Commodity and Derivatives Exchange Ltd. in Mumbai almost doubled in the past year, while sugar jumped 22 percent. Wheat has surged 18 percent in the past year, while corn futures have jumped 29 percent.
Food-grain production reached a record 257.44 million metric tons in the year ended June 30 after a second year of normal rains boosted harvests, the farm ministry said. That prompted the government to lift curbs on exports of rice and wheat last year.
Rice planting dropped 19 percent to 9.68 million hectares (24 million acres) this year from 12.04 million hectares a year earlier, the farm ministry said July 13. The oilseeds area declined 22 percent to 6.77 million hectares from a year earlier, while corn was sown over 2.17 million hectares, less than the 3.13 million hectares a year earlier, it said.
June inflation slows to 7.25% YoY India’s wholesale price index (WPI) rose a lower-than-expected 7.25% in June from a year earlier, mainly driven by higher food prices, government data showed on Monday.
India’s wholesale price index (WPI) rose a lower-than-expected 7.25% in June from a year earlier, mainly driven by higher food prices, government data showed on Monday.
Analysts on average had expected an annual rise of 7.62%, a Reuters poll showed. Wholesale prices provisionally rose 7.55% in May.
The annual reading for April was upwardly revised to 7.5% from 7.23%, the government said in the release.
India’s largest domestic institutional investor – Life Insurance Corporation of India (LIC India) used the sluggish market conditions in FY12 to increase its exposure to equities. The Big Daddy of insurers invested Rs 49,960 crore during the year as against Rs 43,224 crore in FY11, an increase of 26% year-on-year.
At the same time, a combination of falling equity prices and redemptions shrunk LIC’s unit linked insurance policy (ULIP) portfolio by 20% to Rs 1,55,377 crore as on March 31, 2012, a senior official from the corporation told on condition of anonymity.
“In the subdued equity market ULIP portfolio however, has booked a profit through the sale of equity, thereby registering a growth in the profit by nearly 10% over the previous year. In FY12, our total equity portfolio has recorded a significant appreciation on mark-to-market basis even after booking healthy profit during the year,” said the source.
The corporation which has an investment portfolio of over Rs 8 lakh crore plans to invest around Rs 60,000 crore in the equity market in 2012-13, the official said.
In 2011-12, the 30-share BSE Sensex dropped 10.50% as against a rise of nearly 11% in 2010-11. The sharp fall was account of global economic weakening coupled with domestic factors like higher rate of inflation and low GDP growth. The corporation’s total equity portfolio stands more than Rs 8 lakh crore.
During the financial year LIC, a wholly government owned entity, increased its stake in many capital-starved public sector banks. The widening fiscal deficit prompted the government of India, a major stake holder in those banks, to devise a strategy to infuse capital by way of hiking LIC’s stake.
For example, LIC raised stake in Allahabad Bank to 12.93% in Q4 compared with 7.95% in Q1, FY12. During the same period, it upped its holdings from 3.14% to 12.36% in Union Bank of India ; from 7.93% to 10% in Uco Bank ; from 10.43% to 14.53% in Syndicate Bank, among others.
Similarly, LIC played a key pivotal role in the ONGC ‘s share sale in March, 2012. It reportedly acquired 37.71 crore shares of the 42.04 crore shares on offer. LIC’s ownership in the company rose from 3.09% to 7.77% in between June and March quarter, FY12. This decision drew criticism from market participants, who alleged that LIC was forced to bail out the government.
Besides, two private banks also figured in the investment list of LIC during the same period. They included Axis Bank (from 0.86% to 9.69%) and Yes Bank (from 1.90% to 2.38%).
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