Category — Economy

Indian Government to Bail Out State-Owned Banks

Over the next two years, New Delhi plans to pump about $32 billion into state-owned banks in a bid to increase money flow, significantly spur economic activity, loosen credit conditions, and boost investment and growth.

The Economist explains that according to the plan unveiled on October 24th, the ailing banks will lend the government $21 billion, about a third of their combined market value. The government will reinvest this money in bank shares, thus ensuring they no longer need a bail-out. Bankers are being encouraged to use a new bankruptcy code to deal with bust borrowers; raise 580 billion rupees themselves, perhaps by selling non-core assets, and receive a further 180 billion rupees from government coffers left over from a previous scheme.

Indian Rupee Symbol

The total funds for the initiative equal roughly 1.3 percent of the country’s GDP. Within one year of implementation, the drag on bank credit growth is expected to decrease by up to 10 percentage points, while GDP growth could rise by up to 5 percentage points, Goldman Sachs said.

CNBC reports that according to analysts at both Goldman Sachs and ING Bank, the Indian rupee is expected to gain in strength over the next year as a result of recapitalization.

This move is associated with risks:

Interest payment on the bond will come at a budgetary cost, which may increase government expenditure and the fiscal deficit, according to Radhika Rao, economist at Singapore headquartered DBS Bank.

The move could “sustain the risk of more public sector bank loans turning sour, swelling the country’s [bad loan] ratio,” according to a note by ING Bank.

October 28, 2017   No Comments

India’s Digital Transformation Exciting says IMF

India is undergoing an ‘exciting digital transformation,’ that can be a learning experience for everyone, according to the International Monetary Fund which will feature a case study on the country’s digital revolution in its new book.

Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, said that the book Digital Revolutions in Public Finance will featurewhat is happening in the world in terms of the use of digital technology in public finance. It is also looking at the future trying to foresee what is coming as a true set of revolutions. One of the case studies in the book is India. It was also possible to make sure that there were no leakages of any significance in the system, that monies were not being diverted to other ends,”reports the Deccan Herald.
digital technology
Gaspar said that viewed as a social policy, the efficiency and growth of the country’s digital transformation are quite impressive. “So that seems to be the route that India is taking. And from the viewpoint of the Fund, we hope that we’re going to be able to learn a lot from it. And we’re following it closely,” Gaspar added.

October 25, 2017   No Comments

India’s High-Yield Bonds Fuel Overseas Investor Interest

With investor limits for India’s high return sovereign debt almost used up, overseas investors are looking to buy state notes. U.K. headquartered Aberdeen Standard Investments started buying the securities about three months ago and the investment now accounts for about one-fifth of its $312 million Indian bond fund.

Bloomberg Quint says: The highest yields among major Asian emerging markets have made Indian government debt a favorite with overseas investors, who have pumped about $20 billion into rupee securities this year. State bonds, which offer an extra 60-70 basis points of yield over the sovereigns, trade at very similar levels despite differences between the local economies. That’s because the Reserve Bank of India has a zero percent risk rating on the notes, meaning domestic investors treat the unrated securities like federal debt.

A case of dollar bills

Aberdeen’s Lin Jing Leong, a fixed-income investment manager in Singapore said, “We were one of the early asset managers to get into Indian state bonds. We’re definitely seeing others try and get on board.”

October 24, 2017   No Comments

Corporate America Bets on India

John Chambers, executive chairman, Cisco, and chairman, U.S.-India Strategic Partnership Forum says, “While India has long been an important global market, never before has it attracted so much enthusiasm from the American business community.”

Chambers attributes India’s economic transformation, from “slow follower to fast innovator in a matter of several years,” in large part to Prime Minister Modi’s ambitious economic reforms, reports Business Today.

PM Modi and John Chambers

PM Modi and John Chambers

So what are these changes, that Chambers thinks can propel India to be “the second largest economy by 2050“?

In his words…

Rebooting India’s Economy

Demonetizing India’s monetary system is a critical step towards dismantling the cash-centric black market and getting more of the population on a formal, taxable economic grid. The banking system will improve as India heads towards a cashless society, which will ultimately increase credit access and financial inclusion beyond reducing the “black economy.” More importantly, it moves India’s economy into the 21st century.

Adopting the Goods and Services Tax

The Indian government formally adopted the Goods and Service Tax (GST) to streamline the country’s complicated system of local and national tax levies into one payment. Some economic experts project that the implementation of the GST will increase the Indian GDP by 1 to 2 percent.

Propelling India into the Digital Age

Launched in 2015, his [Modi’s] Digital India program has committed unprecedented investments to building the country’s digital infrastructure. Of all the changes ushered in by Modi, I believe this will play the greatest role in providing jobs to India’s rapidly growing workforce, which grows by over 1 million new people each month. And this will not only impact India-collaboration on the digital front, it has the potential to uplift bilateral trade to new heights.

The Prime Minister has the ability to create a vision, communicate it well while building hope for its future, and eventually execute that vision – once he determines something is good for India, he is truly fearless.

October 12, 2017   No Comments

Matthews Asia: India is a fertile environment for an investor

In an interview with Morningstar, Robert Horrocks, Chief Investment Officer of Matthews Asia, the largest dedicated Asia-only investment firm headquartered in Westborough, MA, discussed the investment climate in India with senior editor Emma Wall.

Key takeaways from the interview:

On whether India has lived up to the investment hype under Prime Minister Modi

Horrocks: India has done very well apart from the last year or 18 months or so. But yes, I think, a lot of this was focused on Modi. But you got to remember he is the head of a central part of the government and he has to contend with all the states and the local governments. And that often means things move a little more slowly than you’d like.

On whether there is greater link between politics and markets in emerging markets as opposed to developed markets where the two things can be less connected

Horrocks: The reason for the connection between politics and the economy and the markets in India in particular is they are where China was 20 years ago. They need to build up the infrastructure. These are the things that governments are supposedly doing very well. So, that’s the reason for the linkage.

On the factors that will predict India’s stock market will deliver

Horrocks: Modi has done some things very well indeed. He has put in place a demonetization which I think I would said this would have had a much more detrimental impact on the economy in the short term. He has done some changes to the legal infrastructure to make bankruptcy law a little bit more clear. But these are things that take time.

The other thing I would mention is the achievements of the central bank. India used to be a high inflation economy. It was spending more than it saved. And the actions of the central [bank] over the last five years have brought that core inflation rate right down to a level where India’s savings are now pretty much able to mobilize all the investment it needs in the economy. The inflation rate is very reasonable even for a developed nation. So, it’s not just Modi. India has done quite a few things right.

On the greatest opportunities for an Asian investor

Horrocks: You still have to focus on the management of the business, you still have to look at the businesses that allocate capital properly. One of the issues with India at the moment is the fact that capital is scarce relative to other countries in the region. So, companies have to retain that capital themselves. That means you are putting a greater degree of trust in the management that they are going to look after that for you. So, that’s really the key. But India is a market [where] there’s opportunities across kinds of sectors. So, it’s quite a fertile environment for an investor there.

I would say the one element of caution I would have about India at the moment is the valuations. It is one of the more expensive markets in the region. You are right that a lot of hope surrounds Modi and the government and that’s been priced in a little bit to the market. So, you just have to be cautious and just pick your spots carefully.

But I do think corporate profit growth is still going to be pretty decent over the next few years.

Return on Investment

October 10, 2017   No Comments